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FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
This prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by First Allmerica Financial Life Insurance Company
("Company") to individuals and businesses in connection with retirement plans
which may or may not qualify for special federal income tax treatment. (For
information about the tax status when used with a particular type of plan, see
"FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are collectively referred to herein as the "Contracts." The
following is a summary of information about these Contracts. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the contract's Variable
Account, known as Separate Account VA-K. The Assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in shares of a series of
Allmerica Investment Trust, Variable Insurance Products Fund, Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc., or Delaware Group
Premium Fund, Inc.
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in the Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period,
the value may be increased or decreased by a Market Value Adjustment. Assets
supporting allocations to the Guarantee Period Accounts in the accumulation
phase are held in the Company's Separate Account GPA.
This prospectus gives prospective investors information about the contract that
they should consider before investing. Additional information is contained in a
Statement of Additional Information dated July 8, 1996 ("SAI"), filed with the
Securities and Exchange Commission and incorporated herein by reference. The
Table of Contents of the SAI is on page 3 of this Prospectus. The SAI is
available upon request and without charge through Allmerica Investments, Inc.,
440 Lincoln Street, Worcester, Massachusetts 01653, 1-800-533-7881.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE
INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.
AND DELAWARE GROUP PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME
PORTFOLIO OF VARIABLE INSURANCE PRODUCTS FUND INVESTS IN
HIGHER YIELDING, LOWER RATED DEBT SECURITIES (SEE
"INVESTMENT OBJECTIVES AND POLICIES" IN THIS
PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF
THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR
CREDIT UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL
AGENCY. INVESTMENTS IN THE CONTRACTS ARE SUBJECT TO VARIOUS RISKS,
INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED JULY 8, 1996
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.............. 3
SPECIAL TERMS............................................................. 4
SUMMARY................................................................... 6
ANNUAL AND TRANSACTION EXPENSES........................................... 9
PERFORMANCE INFORMATION................................................... 15
WHAT IS AN ANNUITY?....................................................... 18
RIGHT TO REVOKE OR SURRENDER.............................................. 18
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST, VIP, VIP II,
T. ROWE PRICE AND DGPF................................................... 18
INVESTMENT OBJECTIVES AND POLICIES...................................... 20
INVESTMENT ADVISORY SERVICES............................................ 22
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS...................... 25
VOTING RIGHTS............................................................. 26
CHARGES AND DEDUCTIONS.................................................... 27
A. Annual Charge Against Variable Account Assets..................... 27
B. Contract Fee...................................................... 27
C. Premium Taxes..................................................... 28
D. Contingent Deferred Sales Charge.................................. 28
E. Transfer Charge................................................... 32
DESCRIPTION OF THE CONTRACT............................................... 32
A. Payments.......................................................... 32
B. Transfer Privilege................................................ 33
C. Surrender......................................................... 34
D. Withdrawals....................................................... 34
E. Death Benefit..................................................... 35
F. The Spouse of the Contract Owner as Beneficiary................... 36
G. Assignment........................................................ 36
H. Electing the Form of Annuity and Annuity Date..................... 36
I. Description of Variable Annuity Options........................... 37
J. Norris Decision................................................... 38
K. Computation of Values and Annuity Benefit payments................ 38
GUARANTEE PERIOD ACCOUNTS................................................. 40
FEDERAL TAX CONSIDERATIONS................................................ 42
A. Qualified and Non-Qualified Contracts............................. 42
B. Taxation of the Contracts in General.............................. 43
C. Tax Withholding and Penalties..................................... 44
D. Provisions Applicable to Qualified Employer Plans................. 44
E. Qualified Employee Pension and Profit Sharing Trusts.............. 44
F. Self-Employed Individuals......................................... 44
G. Individual Retirement Account Plans............................... 45
H. Simplified Employee Pensions...................................... 46
I. Public School Systems and Certain Tax-Exempt Organizations........ 46
J. Texas Optional Retirement Program................................. 46
K. Section 457 Plans for State Governments and Tax-Exempt Entities... 46
L. Non-individual Owners............................................. 47
</TABLE>
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<TABLE>
<S> <C> <C>
REPORTS................................................................... 47
LOANS (QUALIFIED CONTRACTS ONLY).......................................... 47
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT.............................. 47
LEGAL MATTERS............................................................. 48
FURTHER INFORMATION....................................................... 48
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................... 49
APPENDIX B -- SURRENDER CHARGE AND MARKET VALUE ADJUSTMENT................ 50
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................... 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES.................................................................. 3
UNDERWRITERS.............................................................. 3
ANNUITY PAYMENTS.......................................................... 4
PERFORMANCE INFORMATION................................................... 5
FINANCIAL STATEMENTS...................................................... 9
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE OR SOLICIT AN OFFER IN THAT STATE.
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SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract, on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Contract Owner's interest in a Sub-Account
before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity
benefit payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed interest rate and to which all or a portion of a payment
or transfer under this Contract may be allocated.
FIXED AMOUNT ANNUITY: an Annuity providing for annuity benefit payments which
remain fixed in an amount throughout the annuity benefit payment period
selected.
GUARANTEED INTEREST RATE: the annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
Separate Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding fund of
Allmerica Investment Trust, a corresponding portfolio of the Variable Insurance
Products Fund or Variable Insurance Products Fund II, the T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc. or a
corresponding series of Delaware Group Premium Fund, Inc.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment Contract.
UNDERLYING FUNDS: the Growth Fund, Investment Grade Income Fund, Money Market
Fund, Equity Index Fund, Government Bond Fund, Select International Equity Fund,
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth
Fund, Select Growth and Income Fund and Small Cap Value Fund of Allmerica
Investment Trust; Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas Portfolio of
Variable Insurance Products Fund; the Fidelity VIP II Asset Manager Portfolio of
Variable Insurance Products Fund II; the T. Rowe Price International Stock
Portfolio of T. Rowe Price International Series, Inc.; and the International
Equity Series of Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other
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than a day during which no payment, withdrawal, or surrender of a Contract was
received) when there is a sufficient degree of trading in an Underlying Fund's
portfolio securities such that the current net asset value of the Sub-Accounts
may be materially affected.
VARIABLE ACCOUNT: Separate Account VA-K, one of the Company's separate
accounts, consisting of assets segregated from other assets of the Company. The
investment performance of the assets of the Variable Account is determined
separately from the other assets of the Company and are not chargeable with
liabilities arising out of any other business which the Company may conduct.
VARIABLE ANNUITY: an Annuity providing for payments varying in amount in
accordance with the investment experience of the Growth Fund, Money Market Fund,
Equity Index Fund or Select Growth and Income Fund of Allmerica Investment
Trust.
5
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SUMMARY
INVESTMENT OPTIONS. The Contracts permit net payments to be allocated among the
Sub-Accounts, the Guarantee Period Account and the Fixed Account. THE FIXED
ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN ALL STATES.
SIMILARLY, NOT ALL SUB-ACCOUNTS MAY BE AVAILABLE IN ALL STATES.
SUB-ACCOUNTS -- The Sub-Accounts are subdivisions of the Variable Account,
established as the Company's Separate Account, VA-K. The Variable Account is
registered as a unit investment trust under the Investment Company Act of 1940,
as amended, (the "1940 Act") but such registration does not involve the
supervision of the management or investment practices or contracts of Variable
Account by the Securities and Exchange Commission (the "SEC").
Each Sub-Account available under the Contracts invests its assets without sales
charge in a corresponding investment series of the Allmerica Investment Trust
("Trust"), Variable Insurance Products Fund ("VIP"), Variable Insurance Products
Fund II ("VIP II"), T. Rowe Price International Series, Inc. ("T. Rowe Price")
or Delaware Group Premium Fund, Inc. ("DGPF"). The Trust, VIP, VIP II, T. Rowe
Price and DGPF are open-end, diversified, series investment companies. Eleven
different funds of the Trust are available under the Contracts: the Growth Fund,
Investment Grade Income Fund, Money Market Fund, Equity Index Fund, Government
Bond Fund, Select International Equity Fund, Select Aggressive Growth Fund,
Select Capital Appreciation Fund, Select Growth Fund, Select Growth and Income
Fund and Small Cap Value Fund of Allmerica Investment Trust. Four of the
portfolios of VIP are available under the Contracts: the Fidelity VIP High
Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas Portfolio. One of the portfolios of VIP II
is available under the Contracts: the Fidelity VIP II Asset Manager Portfolio.
One of the portfolios of T. Rowe Price is available under the Contracts: the T.
Rowe Price International Stock Portfolio. One of the series of DGPF is available
under the Contracts: the International Equity Series. Each of the Funds,
Portfolios and Series available under the Contracts (together, the "Underlying
Funds") operates pursuant to different investment objectives, discussed below.
INVESTMENT IN THE SUB-ACCOUNT. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Funds. There can be no assurance that the investment objectives of
the Underlying Funds can be achieved or that the value of a Contract will equal
or exceed the aggregate amount of the purchase payments made under the Contract.
For more information about the Variable Account, the Company and the investments
of the Underlying Funds, see "DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
THE TRUST, VIP, VIP II, T. ROWE PRICE AND DGPF." The accompanying prospectuses
of the Trust, VIP, VIP II, T. Rowe Price and DGPF describe the investment
objectives and risks of each of the Underlying Funds.
Dividends or capital gains distributions received from an Underlying Fund are
reinvested in additional shares of that Underlying Fund, which are retained as
assets of the Sub-Account.
GUARANTEE PERIOD ACCOUNTS -- Assets supporting the guarantees under the
Guarantee Period Accounts are held in the Company's Separate Account GPA, a
non-unitized insulated separate account. However, values and benefits calculated
on the basis of Guarantee Period Account allocations are obligations of the
Company's General Account. Amounts allocated to a Guarantee Period Account earn
a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available seven Guarantee Periods ranging from three
to ten years in duration (excluding a four year Guarantee Period). Once
declared, the Guaranteed Interest Rate will not change during the duration of
the Guarantee Period. If amounts allocated to a Guarantee Period Account are
transferred, surrendered or applied to an annuity option at any time other than
the day following the last day of the
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applicable Guarantee Period, a Market Value Adjustment will apply that may
increase or decrease the account's value. For more information about the
Guarantee Period Accounts and the Market Value Adjustment, see "GUARANTEE PERIOD
ACCOUNTS."
FIXED ACCOUNT -- The Fixed Account is part of the General Account which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and minimum rate of interest. Additional excess interest may be
declared periodically at the Company's discretion. Furthermore, the initial rate
in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Accounts see Appendix A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
TRANSFERS AMONG ACCOUNTS. Prior to the Annuity Date, the Contracts permit
amounts to be transferred among and between the Sub-Accounts, the Guarantee
Period Accounts and the Fixed Account, subject to certain limitations described
under "Transfer Privilege."
ANNUITY BENEFIT PAYMENTS. The owner of a Contract ("Contract Owner") may select
variable annuity benefit payments based on one or more of certain Sub-Accounts,
fixed-amount annuity benefit payments, or a combination of fixed-amount and
variable annuity benefit payments. Fixed-amount annuity benefit payments are
guaranteed by the Company.
See "DESCRIPTION OF CONTRACT" for information about annuity benefit payment
options, selecting the Annuity Date, and how annuity benefit payments are
calculated.
REVOCATION RIGHTS. An individual purchasing a Contract intended to qualify as
an Individual Retirement Annuity ("IRA") may revoke the Contract within 10 days
after receipt of the Contract. In certain states Contract Owners may have
special revocation rights. For more information about revocation rights, see
"RIGHT TO REVOKE OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Contracts, payments are not limited as
to frequency and number, but no payments may be submitted within one month of
the Annuity Date. Generally, the initial payment must be at least $600 and
subsequent payments must be at least $50. Under a monthly automatic payment plan
or a payroll deduction plan, each payment must be at least $50. However, in
cases where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 ($1,000 in Washington) but
more than $300 annually, the Company may issue a Contract on the employee, if
the plan's average annual contribution per eligible plan participant is at least
$600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Contract. In addition, the Internal Revenue Code imposes
maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. CONTINGENT DEFERRED SALES CHARGE. No sales charge is deducted from payments
at the time they are made. However, depending on the length of time that the
payments to which the withdrawal is attributed have remained credited under the
Contract a contingent deferred sales charge of up to 8% may be assessed for a
surrender, withdrawal, or election of an annuity for any commutable period
certain option or a non-commutable period certain option for less than 10 years.
B. ANNUAL CONTRACT FEE. A $30 Contract Fee will be deducted from the
Accumulated Value under the Contract for administrative expense on the Contract
anniversary, or upon full surrender of the Contract during the year, when the
Accumulated Value is $50,000 or less. The Contract Fee is waived for Contracts
issued to and maintained by the trustee of a 401(k) plan.
C. PREMIUM TAXES. A deduction for State and local premium taxes, if any, may
be made as described under "Premium Taxes."
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D. VARIABLE ACCOUNT ASSET CHARGES. A daily charge, equivalent to 1.25% per
annum, is made on the value of each Sub-Account at each Valuation Date. The
charge is retained for the mortality and expense risks the Company assumes. In
addition, to cover administrative expenses, the Company deducts a daily charge
of 0.20% per annum of the value of the average net assets in the Sub-Accounts.
E. TRANSFER CHARGE. The Company currently makes no charge for processing
transfers. The Company guarantees that the first twelve transfers in a Contract
year will be free of any transfer charge. For each subsequent transfer the
Company reserves the right to assess a charge, guaranteed never to exceed $25,
to reimburse the Company for the cost of processing the transfer.
F. CHARGES OF THE UNDERLYING FUNDS. In addition to the charges described
above, certain fees and expenses are deducted from the assets of the Underlying
Funds. These charges vary among the Underlying Funds.
SURRENDER OR WITHDRAWALS. At any time before the Annuity Date, the Contract
Owner has the right either to surrender the Contract in full and receive its
current value, minus the Contract Fee and any applicable contingent deferred
sales charge, and adjusted for any positive or negative Market Value Adjustment
or to withdraw a portion of the Contract's value subject to certain limits and
any applicable contingent deferred sales charge and/or Market Value Adjustment.
There may be tax consequences for surrender or withdrawals. For further
information, see "Surrender" and "Withdrawals," "Contingent Deferred Sales
Charge," and "FEDERAL TAX CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant, Contract Owner or Joint Owner should die
before the Annuity Date, a death benefit will be paid to the beneficiary. Upon
death of the Annuitant (or an Owner if that Owner is also the Annuitant), the
death benefit is equal to the greatest of (a)the Accumulated Value increased by
any positive Market Value Adjustment; (b) gross payments reduced proportionately
to reflect withdrawals (for each withdrawal the proportionate reduction is
calculated as the death benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or (c) the death benefit that would
have been payable on the most recent Contract Anniversary, increased for
subsequent purchase payments and reduced proportionately to reflect withdrawals
after that date. If an Owner who is not also the Annuitant dies prior to
annuitization, the death benefit will equal the Accumulated Value of the
Contract increased by any positive market value adjustment determined following
receipt of due proof of death at the Principal Office. If the Annuitant dies
after the Annuity Date but before all guaranteed annuity benefit payments have
been made, the remaining payments will be paid to the beneficiary at least as
rapidly as under the annuity option in effect. See "Death Benefit."
SALES OF CONTRACTS. The Contracts are sold by agents of the Company who are
registered representatives of Allmerica Investments, Inc., a broker-dealer
affiliate of the Company. The Contracts also may be purchased from certain other
broker-dealers which are members of the National Association of Securities
Dealers, Inc., and whose representatives are authorized by applicable law to
sell variable annuity Contracts. See "Sales Expense."
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ANNUAL AND TRANSACTION EXPENSES
The purpose of the following tables is to assist the Contract Owner in
understanding the various costs and expenses that a Contract Owner will bear
directly or indirectly under the Contracts. The tables reflect charges under the
Contracts, expenses of the Sub-Accounts, and expenses of the Underlying Funds.
In addition to the charges and expenses described below, in some states premium
taxes may be applicable.
<TABLE>
<CAPTION>
YEARS FROM DATE
CONTRACT OWNER TRANSACTION EXPENSES OF PAYMENT CHARGE
--------------- -----------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: Less than 2 8%
This charge may be assessed upon surrender, withdrawal or 3 7%
annuitization under any commutable period certain option or 4 6%
a noncommutable period certain option of less than 10 years. 5 5%
The charge is a percentage of purchase payments applied to 6 4%
the amount surrendered (in excess of any amount that is free 7 3%
of charge) within the indicated time periods. 8 2%
9 1%
Thereafter 0%
TRANSFER CHARGE: None
The Company currently makes no charge for processing
transfers. The Company guarantees that the first twelve
transfers in a Contract Year will be free of a transfer
charge. For each subsequent transfer, the Company reserves
the right to assess a charge, guaranteed never to exceed
$25, to reimburse the Company for the costs of processing
the transfer.
ANNUAL CONTRACT FEE: $30
A $30.00 annual Contract Fee is deducted when Accumulated
Value is $50,000 or less. The Contract Fee is waived for
Contracts issued to and maintained by the trustee of a
401(k) plan.
VARIABLE ACCOUNT ANNUAL EXPENSES:
(as a percentage of average account value)
Mortality and Expense Risk Fees 1.25 %
Variable Account Administrative Charge 0.20 %
----
Total Annual Expenses 1.45 %
</TABLE>
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ALLMERICA INVESTMENT TRUST
<TABLE>
<CAPTION>
INVESTMENT
GRADE INCOME MONEY EQUITY GOVERNMENT SELECT INT'L
FUND ANNUAL EXPENSES GROWTH FUND FUND MARKET FUND INDEX FUND BOND FUND EQUITY FUND
- --------------------------------------- --------------- --------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees........................ 0.46% 0.41% 0.29% 0.34% 0.50% 1.00%
Other Fund Expenses.................... 0.08% 0.12% 0.07% 0.21% 0.19% 1.24%
--- --- --- --- --- ---
Total Fund Annual Expenses............. 0.54% 0.53% 0.36% 0.55% 0.69% 0.24%
</TABLE>
<TABLE>
<CAPTION>
SELECT SELECT CAPITAL SELECT GROWTH
AGGRESSIVE APPRECIATION SELECT AND INCOME SMALL CAP
FUND ANNUAL EXPENSES GROWTH FUND FUND GROWTH FUND FUND VALUE FUND
- ----------------------------------------------------- ------------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Management Fees...................................... 1.00% 0.43% 0.85% 0.75% 0.85%
Other Fund Expenses.................................. 0.09% 0.92% 0.12% 0.10% 0.16%
--- --- --- --- ---
Total Fund Annual Expenses........................... 1.09% 1.35% 0.97% 0.85% 1.01%
</TABLE>
Under the Management Agreement with the Trust, Allmerica Investment Management
Company, Inc. ("Allmerica Investment") has declared a voluntary expense
limitation of 1.50% of average net assets for the Select International Equity
Fund, 1.35% for the Select Aggressive Growth Fund and Select Capital
Appreciation Fund, 1.25% for the Small Cap Value Fund, 1.20% for the Growth Fund
and Select Growth Fund, 1.10% for the Select Growth and Income Fund, 1.00% for
the Investment Grade Income Fund and Government Bond Fund, and 0.60% for the
Money Market Fund and Equity Index Fund. Without the effect of the expense
limitation, in 1995 the total operation expenses of the Select Capital
Appreciation Fund would have been 1.42% of average net assets. The total
operating expenses of the other funds were less than their respective expense
limitations throughout 1995. The declaration of a voluntary expense limitation
in any year does not bind Allmerica Investment to declare future expense
limitations with respect to any Fund.
VARIABLE INSURANCE PRODUCTS FUND
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS
PORTFOLIO ANNUAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Management Fees.......................................... 0.60% 0.51% 0.61% 0.76%
Other Portfolio Expenses................................. 0.11% 0.10% 0.09% 0.15%
--- --- --- ---
Total Portfolio Annual Expenses.......................... 0.71% 0.61%* 0.70%* 0.91%
</TABLE>
* A portion of the brokerage commissions the Portfolio paid was used to reduce
the expenses. Without this reduction, total operating expenses would have
been 0.60% for the Fidelity VIP Equity-Income Portfolio and 0.70% for the
Fidelity VIP Growth Portfolio.
Fidelity Management has voluntarily agreed to temporarily limit total operating
expenses (excluding interest, taxes, brokerage commissions and extraordinary
expenses) of the Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas Portfolio to an annual rate of 1.50%, and
the Fidelity VIP High Income Portfolio to an annual rate of 1.00%, of each of
the Portfolio's net assets. The total operating expenses of the Portfolios were
less than their respective caps in 1995.
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VARIABLE INSURANCE PRODUCTS FUND II
<TABLE>
<CAPTION>
FIDELITY VIP II
ASSET MANAGER
PORTFOLIO ANNUAL EXPENSES PORTFOLIO
- --------------------------------------------------------------------- ----------------
<S> <C>
Management Fees...................................................... 0.71%
Other Portfolio Expenses............................................. 0.08%
---
Total Portfolio Annual Expenses...................................... 0.79%*
</TABLE>
* A portion of the brokerage commissions the Portfolio paid was used to reduce
its expenses. Without this reduction, total operating expenses would have
been 0.81% for the Asset Manager Portfolio.
Fidelity Management has voluntarily agreed to temporarily limit total operating
expenses (excluding interest, taxes, brokerage commissions and extraordinary
expenses) of the Fidelity VIP II Asset Manager Portfolio to an annual rate of
1.25% of the Portfolio's net assets. The total operating expenses of the
Fidelity VIP II Asset Manager Portfolio were less than its cap in 1995.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
<TABLE>
<CAPTION>
T. ROWE PRICE
INTERNATIONAL
FUND ANNUAL EXPENSES STOCK PORTFOLIO
- --------------------------------------------------------------------- ---------------
<S> <C>
Management Fees...................................................... 1.05%
Other Portfolio Expenses............................................. 0.00%
---
Total Fund Annual Expenses........................................... 1.05%
</TABLE>
DELAWARE GROUP PREMIUM FUND
<TABLE>
<CAPTION>
INTERNATIONAL
FUND ANNUAL EXPENSES EQUITY SERIES
- ---------------------------------------------------------------------- ---------------
<S> <C>
Management Fees....................................................... 0.65%
Other Series Expenses................................................. 0.15%
---
Total Fund Annual Expenses............................................ 0.80%
</TABLE>
Delaware International Advisers Ltd., the investment adviser for the
International Equity Series, has agreed to waive its management fee and
reimburse the International Equity Series to limit certain expenses to 8/10 of
1% of the corresponding net assets. This waiver has been in effect from the
commencement of the public offering for the Series and has been extended through
December 31, 1996. Without the expense limitation, in 1995 the total annual
expenses of the International Equity Series would have been 0.89%.
The following examples demonstrate the cumulative expenses which would be paid
by the Contract Owner at 1-year, 3-year, 5-year, and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. Because the expenses of the Underlying Funds
differ, separate examples are used to illustrate the expenses incurred by a
Contract Owner on an investment in the various Sub-Accounts.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
11
<PAGE>
(a) If you surrender your Contract or annuitize* under a commutable period
certain option or a noncommutable period certain option of less than 10 years at
the end of the applicable period, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Fund.............................. $ 94 $ 129 $ 159 $ 246
Investment Grade Income Fund............. $ 94 $ 130 $ 160 $ 248
Money Market Fund........................ $ 93 $ 126 $ 153 $ 235
Equity Index Fund........................ $ 94 $ 130 $ 159 $ 247
Government Bond Fund..................... $ 95 $ 134 $ 166 $ 261
Select International Equity Fund......... $ 103 $ 158 $ 206 $ 338
T. Rowe Price International Stock
Portfolio............................... $ 99 $ 144 $ 184 $ 295
Select Aggressive Growth Fund............ $ 100 $ 147 $ 189 $ 306
Select Capital Appreciation Fund......... $ 102 $ 153 $ 198 $ 324
Select Growth Fund....................... $ 98 $ 144 $ 183 $ 293
Select Growth and Income Fund............ $ 97 $ 140 $ 177 $ 282
Small Cap Value Fund..................... $ 99 $ 145 $ 185 $ 298
Fidelity VIP High Income Portfolio....... $ 95 $ 134 $ 166 $ 262
Fidelity VIP Equity-Income Portfolio..... $ 94 $ 130 $ 160 $ 248
Fidelity VIP Growth Portfolio............ $ 95 $ 133 $ 165 $ 260
Fidelity VIP Overseas Portfolio.......... $ 97 $ 140 $ 177 $ 283
Fidelity VIP II Asset Manager
Portfolio............................... $ 96 $ 137 $ 171 $ 271
DGPF International Equity Series......... $ 96 $ 137 $ 171 $ 271
</TABLE>
(b) If you annuitize* under a life option or any noncommutable period certain
option of 10 years or more at the end of the applicable time period or if you do
not surrender or annuitize your Contract, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Fund.............................. $ 22 $ 67 $ 114 $ 246
Investment Grade Income Fund............. $ 22 $ 67 $ 115 $ 248
Money Market Fund........................ $ 21 $ 63 $ 109 $ 235
Equity Index Fund........................ $ 22 $ 67 $ 115 $ 247
Government Bond Fund..................... $ 23 $ 71 $ 122 $ 261
Select International Equity Fund......... $ 31 $ 95 $ 161 $ 338
T. Rowe Price International Stock
Portfolio............................... $ 27 $ 81 $ 139 $ 295
Select Aggressive Growth Fund............ $ 28 $ 85 $ 144 $ 306
Select Capital Appreciation Fund......... $ 30 $ 90 $ 154 $ 324
Select Growth Fund....................... $ 26 $ 81 $ 138 $ 293
Select Growth and Income Fund............ $ 25 $ 77 $ 132 $ 282
Small Cap Value Fund..................... $ 27 $ 82 $ 141 $ 298
Fidelity VIP High Income Portfolio....... $ 23 $ 71 $ 122 $ 262
Fidelity VIP Equity-Income Portfolio..... $ 22 $ 67 $ 115 $ 248
Fidelity VIP Growth Portfolio............ $ 23 $ 71 $ 121 $ 260
Fidelity VIP Overseas Portfolio.......... $ 25 $ 78 $ 133 $ 283
Fidelity VIP II Asset Manager
Portfolio............................... $ 24 $ 74 $ 127 $ 271
DGPF International Equity Series......... $ 24 $ 74 $ 127 $ 271
</TABLE>
* The Contract Fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year
under an option including a life contingency or under any noncommutable
period certain option of 10 years or more.
Pursuant to requirements of the 1940 Act, the Contract Fee has been reflected in
the examples by a method intended to show the "average" impact of the Contract
Fee on an investment in the Variable
12
<PAGE>
Account. The total Contract fees collected under the Contracts by the Company
are divided by the total average net assets attributable to the Contracts. The
resulting percentage is 0.12%, and the amount of the Contract Fee fee is assumed
to be $1.20 in the examples. The Contract Fee is deducted only when the
accumulated value is $50,000 or less. Lower costs apply to Contracts originally
issued as part of a 401(k) plan.
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
SUB-ACCOUNT 1 (GROWTH FUND)
Unit Value:
Beginning of Period............................................................................ 1.037 1.000
End of Period.................................................................................. 1.359 1.037
Number of Units Outstanding at End of Period (in thousands)...................................... 2,436 947
SUB-ACCOUNT 2 (INVESTMENT GRADE INCOME FUND)
Unit Value:
Beginning of Period............................................................................ 0.990 1.000
End of Period.................................................................................. 1.151 0.990
Number of Units Outstanding at End of Period (in thousands)...................................... 1,677 516
SUB-ACCOUNT 3 (MONEY MARKET FUND)
Unit Value:
Beginning of Period............................................................................ 1.020 1.000
End of Period.................................................................................. 1.064 1.020
Number of Units Outstanding at End of Period (in thousands)...................................... 4,194 1,837
SUB-ACCOUNT 4 (EQUITY INDEX FUND)
Unit Value:
Beginning of Period............................................................................ 1.035 1.000
End of Period.................................................................................. 1.390 1.035
Number of Units Outstanding at End of Period (in thousands)...................................... 947 189
SUB-ACCOUNT 5 (GOVERNMENT BOND FUND)
Unit Value:
Beginning of Period............................................................................ 0.998 1.000
End of Period.................................................................................. 1.113 0.998
Number of Units Outstanding at End of Period (in thousands)...................................... 1,098 363
SUB-ACCOUNT 6 (SELECT AGGRESSIVE GROWTH FUND)
Unit Value:
Beginning of Period............................................................................ 1.023 1.000
End of Period.................................................................................. 1.335 1.023
Number of Units Outstanding at End of Period (in thousands)...................................... 2,907 1,211
SUB-ACCOUNT 7 (SELECT GROWTH FUND)
Unit Value:
Beginning of Period............................................................................ 1.057 1.000
End of Period.................................................................................. 1.229 1.057
Number of Units Outstanding at End of Period (in thousands)...................................... 1,278 406
SUB-ACCOUNT 8 (SELECT GROWTH AND INCOME FUND)
Unit Value:
Beginning of Period............................................................................ 1.030 1.000
End of Period.................................................................................. 1.324 1.030
Number of Units Outstanding at End of Period (in thousands)...................................... 2,173 832
SUB-ACCOUNT 9 (SMALL CAP VALUE FUND)
Unit Value:
Beginning of Period............................................................................ 0.975 1.000
End of Period.................................................................................. 1.131 0.975
Number of Units Outstanding at End of Period (in thousands)...................................... 1,614 795
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
SUB-ACCOUNT 11 (SELECT INTERNATIONAL EQUITY FUND)
Unit Value:
Beginning of Period............................................................................ 0.956 1.000
End of Period.................................................................................. 1.128 0.956
Number of Units Outstanding at End of Period (in thousands)...................................... 2,093 446
SUB-ACCOUNT 12 (SELECT CAPITAL APPRECIATION FUND)
Unit Value
Beginning of Period............................................................................ 1.000 n/a
End of Period.................................................................................. 1.115 n/a
Number of Units Outstanding at End of Period (in thousands)...................................... 1,069 n/a
SUB-ACCOUNT 20 (DGPF INTERNATIONAL EQUITY SERIES)
Unit Value:
Beginning of Period............................................................................ 0.993 1.000
End of Period.................................................................................. 1.115 0.993
Number of Units Outstanding at End of Period (in thousands)...................................... 1,304 667
SUB-ACCOUNT 102 (FIDELITY VIP HIGH INCOME PORTFOLIO)
Unit Value:
Beginning of Period............................................................................ 0.995 1.000
End of Period.................................................................................. 1.184 0.995
Number of Units Outstanding at End of Period (in thousands)...................................... 2,530 985
SUB-ACCOUNT 103 (FIDELITY VIP EQUITY-INCOME PORTFOLIO)
Unit Value:
Beginning of Period............................................................................ 1.073 1.000
End of Period.................................................................................. 1.430 1.073
Number of Units Outstanding at End of Period (in thousands)...................................... 5,738 2,214
SUB-ACCOUNT 104 (FIDELITY VIP GROWTH PORTFOLIO)
Unit Value:
Beginning of Period............................................................................ 1.073 1.000
End of Period.................................................................................. 1.433 1.073
Number of Units Outstanding at End of Period (in thousands)...................................... 4,952 1,944
SUB-ACCOUNT 105 (FIDELITY VIP OVERSEAS PORTFOLIO)
Unit Value:
Beginning of Period............................................................................ 0.978 1.000
End of Period.................................................................................. 1.058 0.978
Number of Units Outstanding at End of Period (in thousands)...................................... 2,804 1,697
SUB-ACCOUNT 106 (FIDELITY VIP II ASSET MANAGER PORTFOLIO)
Unit Value:
Beginning of Period............................................................................ 0.985 1.000
End of Period.................................................................................. 1.137 0.985
Number of Units Outstanding at End of Period (in thousands)...................................... 2,025 1,240
SUB-ACCOUNT 150 (T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO)
Unit Value:
Beginning of Period............................................................................ 1.000 n/a
End of Period.................................................................................. 1.064 n/a
Number of Units Outstanding at End of Period (in thousands)...................................... 542 n/a
</TABLE>
- --------------------------
*The dates of inception of the above Sub-Accounts are as follows:
4/29/85 for Growth Fund, Investment Grade Income Fund and Money Market Fund;
9/28/90 for Equity Index; 8/26/91 for Government Bond; 8/21/92 for Select
Aggressive Growth, Select Growth and Select Growth and Income; 4/30/93 for Small
Cap Value; 5/01/94 for Select International Equity; 4/28/95 for Select Capital
Appreciation; 10/09/86 for Fidelity VIP Equity-Income and Fidelity VIP Growth;
9/19/85 for Fidelity VIP High Income; 1/28/87 for Fidelity VIP Overseas; 9/06/89
for Fidelity VIP II Asset Manager; 10/29/92 for DGPF International Equity;
3/31/94 for the T. Rowe Price International Stock.
14
<PAGE>
PERFORMANCE INFORMATION
The Contracts were first offered to the public in 1996. However, the Company may
advertise "Total Return" and "Average Annual Total" Return performance
information based on the periods that the Underlying Funds have been in
existence. The results for any period prior to the Contracts being offered will
be calculated as if the Contracts had been offered during that period of time,
with all charges assumed to be those applicable to the Sub-Accounts, the
Underlying Funds, and (in Table 1) assuming that the Contract is surrendered at
the end of the applicable period. Both the total return and yield figures are
based on historical earnings and are not intended to indicate future
performance.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage of the investment.
The "yield" of the Sub-Account investing in the Money Market Fund of the Trust
refers to the income generated by an investment in the Sub-Account over a
seven-day period (which period will be specified in the advertisement). This
income is then "annualized" by assuming that the income generated in the
specific week is generated over a 52-week period. This annualized yield is shown
as a percentage of the investment. The "effective yield" calculation is similar,
but when annualized, the income earned by an investment in the Sub-Account is
assumed to be reinvested. Thus the "effective yield" will be slightly higher
than the "yield" because of the compounding effect of this assumed reinvestment.
The total return, yield, and effective yield figures are adjusted to reflect the
Sub-Account's asset charges. The total return figures also reflect the $30
annual Contract Fee and the contingent deferred sales charge which would be
assessed if the investment were completely withdrawn at the end of the specified
period.
The Company may also advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes of value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is NOT
withdrawn at the end of the specified period, the contingent deferred sales
charge is NOT included in the calculation of supplemental total return.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S & P
500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond
Index or other unmanaged indices so that investors may compare the Sub-Account
results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of variable annuity separate accounts or other investment products
tracked by Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, such as Morningstar, Inc., who rank such investment
products on overall performance or other criteria; or (iii) the Consumer Price
Index (a measure for inflation) to assess the real rate of return from an
investment in the Sub-Account. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies, characteristics and quality
of the portfolio of the Underlying Fund in which the Sub-Account invests and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
15
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR 10 YEARS
ENDED OR SINCE
SUB-ACCOUNT NAME OF UNDERLYING FUND 12/31/95 3 YEARS 5 YEARS INCEPTION*
- ---------------- ----------------------------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sub-Account 1 Growth Fund 22.93% 8.85% 13.86% 13.12%
Sub-Account 2 Investment Grade Income Fund 8.18% 4.58% 7.26% 7.51%
Sub-Account 3 Money Market Fund (3.18)% 0.57% 1.76% 4.38%
Sub-Account 4 Equity Index Fund 26.27% 11.19% 7.45% 14.82%
Sub-Account 5 Government Bond Fund 3.46% 2.75% N/A 5.21%
Sub-Account 6 Select Aggressive Growth Fund 22.43% 12.14% N/A 17.22%
Sub-Account 7 Select Growth Fund 14.83% 3.82% N/A 6.92%
Sub-Account 8 Select Growth and Income Fund 20.50% 9.65% N/A 8.60%
Sub-Account 9 Small Cap Value Fund 7.95% N/A N/A 6.22%
Sub-Account 11 Select Int'l. Equity Fund 9.94% N/A N/A 2.79%
Sub-Account 12 Select Capital Appreciation Fund N/A N/A N/A 30.19%
Sub-Account 102 Fidelity VIP High Income Portfolio 10.91% 9.17% 16.44% 9.86%
Sub-Account 103 Fidelity VIP Equity-Income 25.20% 16.19% 18.86% 11.70%
Portfolio
Sub-Account 104 Fidelity VIP Growth Portfolio 25.47% 13.92% 18.32% 13.18%
Sub-Account 105 Fidelity VIP Overseas Portfolio 0.34% 11.80% 5.44% 5.69%
Sub-Account 106 Fidelity VIP II Asset Manager 7.31% 6.39% 10.19% 9.34%
Portfolio
Sub-Account 150 T. Rowe Price International Stock 1.68% N/A N/A 0.89%
Portfolio
Sub-Account 20 DGPF International Equity Series 4.27% N/A N/A 5.48%
</TABLE>
16
<PAGE>
ANNUAL AVERAGE TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1995
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR 10 YEARS
ENDED OR SINCE
SUB-ACCOUNT NAME OF UNDERLYING FUND 12/31/95 3 YEARS 5 YEARS INCEPTION*
- ---------------- ----------------------------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sub-Account 1 Growth Fund 30.93% 10.79% 14.68% 13.12%
Sub-Account 2 Investment Grade Fund 16.18% 6.67% 8.29% 7.51%
Sub-Account 3 Money Market Fund 4.34% 2.77% 3.03% 4.38%
Sub-Account 4 Equity Index Fund 34.27% 13.05% 8.48% 15.24%
Sub-Account 5 Government Bond Fund 11.46% 4.91% N/A 6.16%
Sub-Account 6 Select Aggressive Growth Fund 30.43% 13.97% N/A 18.43%
Sub-Account 7 Select Growth Fund 22.83% 5.95% N/A 8.42%
Sub-Account 8 Select Growth and Income Fund 28.50% 11.56% N/A 2.85%
Sub-Account 9 Small Cap Value Fund 15.95% N/A N/A 8.55%
Sub-Account 11 Select Int'l. Equity Fund 17.94% N/A N/A 7.44%
Sub-Account 12 Select Capital Appreciation Fund N/A N/A N/A 38.19%
Sub-Account 102 Fidelity VIP High Income Portfolio 18.91% 11.09% 17.19% 9.86%
Sub-Account 103 Fidelity VIP Equity-Income 33.20% 17.89% 19.56% 11.70%
Portfolio
Sub-Account 104 Fidelity VIP Growth Portfolio 33.47% 15.69% 19.02% 13.18%
Sub-Account 105 Fidelity VIP Overseas Portfolio 8.12% 13.64% 6.55% 5.76%
Sub-Account 106 Fidelity VIP II Asset Manager 15.31% 8.41% 11.12% 9.64%
Portfolio
Sub-Account 150 T. Rowe Price International Stock 9.56% N/A N/A 5.76%
Portfolio
Sub-Account 20 DGPF International Equity Series 12.27% N/A N/A 7.14%
</TABLE>
- ------------------------------
* The inception dates of the Underlying Funds are: 4/29/85 for Growth Fund,
Investment Grade Fund and Money Market Fund; 9/28/90 for Equity Index Fund;
8/26/91 for Government Bond Fund; 8/21/92 for Select Aggressive Growth Fund,
Select Growth Fund, Select Growth and Income Fund; 4/30/93 for Small Cap Value
Fund; 5/01/94 for Select International Equity Fund; 4/28/95 for Select Capital
Appreciation Fund; 10/09/86 for Fidelity VIP Equity-Income Portfolio and
Fidelity VIP Growth Portfolio; 9/19/85 for Fidelity VIP High Income Portfolio;
1/28/87 for Fidelity VIP Overseas Portfolio; 9/06/89 for Fidelity VIP II Asset
Manager Portfolio; 10/29/92 for DGPF International Equity Series; 3/31/94 for
the T. Rowe Price International Stock Portfolio.
17
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is a contract designed to provide a retirement income in
the form of periodic payments for the lifetime of the Contract Owner or an
individual chosen by the Contract Owner. The retirement income payments are
called "annuity benefit payments" and the individual receiving the payments is
called the "Annuitant." Annuity benefit payments begin on the annuity date.
Under an annuity contract, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity benefit payments will continue for the life of the Annuitant,
regardless of how long the Annuitant lives or how long all Annuitants as a group
live. The expense risk arises from the insurance company's guarantee that
charges will not be increased beyond the limits specified in the Contract,
regardless of actual costs of operations.
The Contract Owner's payments, less any applicable deductions, are invested by
the insurance company. After retirement, annuity benefit payments are paid to
the Annuitant for life or for such other period chosen by the Contract Owner. In
the case of a "fixed" annuity, the value of these annuity benefit payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed annuities see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT." With a variable annuity, the value of the Contract and the annuity
benefit payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Contract and in the annuity benefit payments. If
the portfolio increases in value, the value of the Contract increases. If the
portfolio decreases in value, the value of the Contract decreases.
RIGHT TO REVOKE OR SURRENDER
A Contract Owner may revoke the Contract at any time between the date of
application and the date 10 days after receipt of the Contract. Within seven
days, the Company will send the Contract Owner a refund of the greater of (1)
the entire purchase price or (2) the Accumulated Value plus any amounts deducted
under the Contract or by the Underlying Funds for taxes, charges or fees. In
order to revoke the Contract, the Contract Owner must mail or deliver the
Contract (if it has already been received), to the Principal Office of the
Company at 440 Lincoln Street, Worcester, Massachusetts 01653, or to an agent of
the Company. Mailing or delivery must occur on or before 10 days after receipt
of the Contract for revocation to be effective.
If on the date of revocation the Surrender Value of the Contract exceeds the
total purchase payment, the Company will treat the revocation request as a
request for surrender (see "Surrender") and will pay the Contract Owner the
Surrender Value of the Contract.
The liability of the Variable Account under this provision is limited to the
Contract Owner's Accumulated value in the Variable Account on the date of
cancellation. Any additional amounts refunded to the Contract Owner will be paid
by the Company.
The refund of any premium paid by check may be delayed until the check has
cleared the Contract Owner's bank.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST,
VIP, VIP II, T. ROWE PRICE AND DGPF
THE COMPANY -- The Company, originally organized under the laws of Massachusetts
in 1844 as a mutual life insurance company and formerly known as State Mutual
Life Assurance Company of America, converted to a stock life insurance company
on October 16, 1995 and adopted its present
18
<PAGE>
name, First Allmerica Financial Life Insurance Company. The Company is the fifth
oldest life insurance company in America. As of December 31, 1995, the Company
and its subsidiaries had over $11 billion in combined assets and over $35.2
billion in life insurance in force.
The Company's principal office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000 ("Principal Office"). The Company is
subject to the laws of the Commonwealth of Massachusetts governing insurance
companies, to regulation by the Commissioner of Insurance of Massachusetts and
to the insurance laws and regulations of other states and jurisdictions in which
it is licensed to operate.
THE VARIABLE ACCOUNT -- The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contracts are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Contracts. Each Sub-
Account is administered and accounted for as part of the general business of the
Company, but the income, capital gains, or capital losses of each Sub-Account
are allocated to such Sub-Account, without regard to other income, capital
gains, or capital losses of the Company. Under Massachusetts law, the assets of
the Variable Account may not be charged with any liabilities arising out of any
other business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Variable Account meets the definition of
"separate account" under federal securities law and is registered with the
Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940 ("1940 Act"). The registration of the
Variable Account and the Underlying Investment Companies does not involve the
supervision by the Commission of management or investment practices or Contracts
of the Variable Account, the Company, the Underlying Investment Companies or the
Underlying Funds.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
ALLMERICA INVESTMENT TRUST -- Allmerica Investment Trust ( "Trust") is an
open-end, diversified, management investment company registered with the
Commission under the 1940 Act.
The Trust was established as a Massachusetts business trust on October 11, 1984,
for the purpose of providing a vehicle for the investment of assets of various
variable accounts established by the Company or other affiliated insurance
companies. Eleven investment portfolios ("Funds") are currently available under
the Contracts, each issuing a series of shares: the Growth Fund, Investment
Grade Income Fund, Money Market Fund, Equity Index Fund, Government Bond Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Growth Fund, Select Growth and Income Fund and Small
Cap Value Fund of Allmerica Investment Trust. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund have no effect on the
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
Allmerica Investment Management Company, Inc. ("Allmerica Investment") serves as
investment adviser of the Trust. Allmerica Investment has entered into
Sub-Advisory Agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Funds. See "INVESTMENT ADVISORY SERVICES TO THE
TRUST."
VARIABLE INSURANCE PRODUCTS FUND -- Variable Insurance Products Fund ("VIP"),
managed by Fidelity Management & Research Company ("Fidelity Management"), is an
open-end, diversified, management investment company organized as a
Massachusetts business trust on November 13, 1981 and registered with the
Commission under the 1940 Act. Four of its investment portfolios are available
under the Contracts: the Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas
Portfolio.
19
<PAGE>
Various Fidelity companies perform certain activities required to operate VIP.
Fidelity Management, a registered investment adviser under the Investment
Advisers Act of 1940, is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of financial services and products. Fidelity Management is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. The
Portfolios of VIP as part of their operating expenses pay an investment
management fee to Fidelity Management. See "INVESTMENT ADVISORY SERVICES TO VIP
AND VIP II."
VARIABLE INSURANCE PRODUCTS FUND II -- Variable Insurance Products Fund II ("VIP
II"), managed by Fidelity Management (see discussion under "VARIABLE INSURANCE
PRODUCTS FUND"), is an open-end, diversified, management investment company
organized as a Massachusetts business trust on March 21, 1988 and registered
with the Commission under the 1940 Act. One of its investment portfolios is
available under the Contracts: the Fidelity VIP II Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. -- T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming") (See "INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE"), is an
open-end, diversified, management investment company organized as a Maryland
corporation in 1994 and registered with the Commission under the 1940 Act. One
of its investment portfolios is available under the Contracts: the T. Rowe Price
International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC. -- Delaware Group Premium Fund, Inc. ("DGPF")
is an open-end, diversified management investment company registered with the
Commission under the 1940 Act.
DGPF was established to provide a vehicle for the investment of assets of
various variable accounts supporting variable insurance Contracts. One
investment portfolio ("Series") is available under the Contracts, the
International Equity Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). See
"INVESTMENT ADVISORY SERVICES TO DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS, AND OTHER
RELEVANT INFORMATION REGARDING THE UNDERLYING FUNDS MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING. The
Statements of Additional Information of the Underlying Funds are available upon
request. There can be no assurance that the investment objectives of the
Underlying Funds can be achieved or that the value of a Contract will equal or
exceed the aggregate amount of the purchase payments made under the Contract.
SUB-ACCOUNT 1 -- invests solely in shares of the Growth Fund of the Trust. The
Growth Fund is invested in common stocks and securities convertible into common
stocks that are believed to represent significant underlying value in relation
to current market prices. The objective of the Growth Fund is to achieve
long-term growth of capital. Realization of current investment income, if any,
is incidental to this objective.
SUB-ACCOUNT 2 -- invests solely in shares of the Investment Grade Income Fund of
the Trust. The Investment Grade Income Fund is invested in a diversified
portfolio of fixed income securities with the objective of seeking as high a
level of total return (including both income and realized and unrealized capital
gains) as is consistent with prudent investment management.
20
<PAGE>
SUB-ACCOUNT 3 -- invests solely in shares of the Money Market Fund of the Trust.
The Money Market Fund is invested in a diversified portfolio of high-quality,
short-term debt instruments with the objective of obtaining maximum current
income consistent with the preservation of capital and liquidity.
SUB-ACCOUNT 4 -- invests solely in shares of the Equity Index Fund of the Trust.
The Equity Index Fund seeks to provide investment results that correspond
generally to the composite price and yield performance of United States publicly
traded common stocks. The Equity Index Fund seeks to achieve its objective by
attempting to replicate the composite price and yield performance of the
Standard & Poor's 500 Composite Stock Index.
SUB-ACCOUNT 5 -- invests solely in shares of the Government Bond Fund of the
Trust. The Government Bond Fund has the investment objective of seeking high
income, preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities.
SUB-ACCOUNT 6 -- invests solely in shares of the Select Aggressive Growth Fund
of the Trust. The Select Aggressive Growth Fund seeks above-average capital
appreciation by investing primarily in common stocks of companies which are
believed to have significant potential for capital appreciation.
SUB-ACCOUNT 7 -- invests solely in shares of the Select Growth Fund of the
Trust. The Select Growth Fund seeks to achieve long-term growth of capital by
investing in a diversified portfolio consisting primarily of common stocks
selected on the basis of their long-term growth potential.
SUB-ACCOUNT 8 -- invests solely in shares of the Select Growth and Income Fund
of the Trust. The Select Growth and Income Fund seeks a combination of long-term
growth of capital and current income. The Fund will invest primarily in
dividend-paying common stocks and securities convertible into common stocks.
SUB-ACCOUNT 9 -- invests solely in shares of the Small Cap Value Fund of the
Trust. The Small Cap Value Fund seeks long-term growth by investing principally
in a diversified portfolio of common stocks of smaller, faster-growing companies
considered to be attractively valued in the smaller company sector of the
market.
SUB-ACCOUNT 11 -- invests solely in shares of the Select International Equity
Fund of the Trust. The Select International Equity Fund seeks maximum long-term
total return (capital appreciation and income) primarily by investing in common
stocks of established non-U.S. companies.
SUB-ACCOUNT 12 -- invests solely in shares of the Select Capital Appreciation
Fund of the Trust. The Select Capital Appreciation Fund seeks long-term growth
of capital in a manner consistent with the preservation of capital. Realization
of income is not a significant investment consideration and any income realized
on the Fund's investments will be incidental to its primary objective. The Fund
will invest primarily in common stock of industries and companies which are
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
SUB-ACCOUNT 20 -- invests solely in shares of the International Equity Series of
DGPF. The International Equity Series seeks long-term growth without undue risk
to principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
SUB-ACCOUNT 102 -- invests solely in shares of the Fidelity VIP High Income
Portfolio of VIP. The Fidelity VIP High Income Portfolio seeks to obtain a high
level of current income by investing primarily in high-yielding, lower-rated
fixed-income securities (commonly referred to as "junk bonds"), while also
considering growth of capital. These securities are often considered to be
speculative and involve greater risk of default or price changes than securities
assigned a high quality rating. For more information about these lower-rated
securities, see "Risks of Lower-Rated Debt Securities" in the VIP prospectus.
21
<PAGE>
SUB-ACCOUNT 103 -- invests solely in shares of the Fidelity VIP Equity-Income
Portfolio of VIP. The Fidelity VIP Equity-Income Portfolio seeks reasonable
income by investing primarily in income-producing equity securities. In choosing
these securities, the Portfolio will also consider the potential for capital
appreciation. The Portfolio's goal is to achieve a yield which exceeds the
composite yield on the securities comprising the Standard & Poor's 500 Composite
Stock Price Index. The Portfolio may invest in high yielding, lower-rated
securities (commonly referred to as "junk bonds") which are subject to greater
risk than investments in higher-rated securities. For a further discussion of
lower-rated securities, please see "Risks of Lower-Rated Debt Securities" in the
VIP prospectus.
SUB-ACCOUNT 104 -- invests solely in shares of the Fidelity VIP Growth Portfolio
of VIP. The Fidelity VIP Growth Portfolio seeks to achieve capital appreciation.
The Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
SUB-ACCOUNT 105 -- invests solely in shares of the Fidelity VIP Overseas
Portfolio of VIP. The Fidelity VIP Overseas Portfolio seeks long-term growth of
capital primarily through investments in foreign securities and provides a means
for aggressive investors to diversify their own portfolios by participating in
companies and economies outside of the United States.
SUB-ACCOUNT 106 -- invests solely in shares of the Fidelity VIP II Asset Manager
Portfolio of VIP II. The Fidelity VIP II Asset Manager Portfolio seeks high
total return with reduced risk over the long-term by allocating its assets among
domestic and foreign stocks, bonds and short-term fixed-income instruments.
SUB-ACCOUNT 150 -- invests solely in shares of the T. Rowe Price International
Stock Portfolio of T. Rowe Price. The T. Rowe Price International Stock
Portfolio seeks long-term growth of capital through investments primarily in
common stocks of established, non-U.S. companies.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR CONTRACTS SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUBACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE TRUST, VIP, VIP II, T. ROWE PRICE AND DGPF ALONG WITH THIS PROSPECTUS.
THE MONEY MARKET PORTFOLIO OF VIP AND CERTAIN OTHER PORTFOLIOS OFFERED BY THE
UNDERLYING INVESTMENT COMPANIES ARE NOT AVAILABLE UNDER THIS CONTRACT.
In the event of a material change in the investment policy of a Sub-Account or
the Underlying Fund in which it invests, the Contract Owner will be notified of
the change. No material changes in the investment policy of the Variable Account
or any Sub-Accounts will be made without approval pursuant to the applicable
state insurance laws. If the Contract Owner has Contract Value in that
Sub-Account, the Company will transfer it without charge on written request by
the Contract Owner to another Sub-Account or to the Fixed Account. The Company
must receive the Contract Owner's written request within sixty (60) days of the
later of (1) the effective date of such change in the investment policy or (2)
the receipt of the notice of the Contract Owner's right to transfer.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST -- The overall responsibility for the
supervision of the affairs of the Trust vests in the Trustees. The Trust has
entered into a Management Agreement with Allmerica Investment Management
Company, Inc. ("Allmerica Investment"), an indirectly wholly-owned subsidiary of
the Company, to handle the day-to-day affairs of the Trust. Allmerica
Investment, subject to review by the Trustees, is responsible for the general
management of the Funds. Allmerica Investment is also obligated to perform
certain administrative and management services for the Trust, furnish to the
Trust all necessary office space, facilities, and equipment, and pay the
compensation, if any, of officers and Trustees who are affiliated with Allmerica
Investment.
22
<PAGE>
Other than the expenses specifically assumed by Allmerica Investment under the
Management Agreement, all expenses incurred in the operation of the Trust are
borne by it, including fees and expenses associated with the registration and
qualification of the Trust's shares under the Securities Act of 1933, other fees
payable to the Commission, independent public accountant, legal and custodian
fees, association membership dues, taxes, interest, insurance premiums,
brokerage commission, fees and expenses of the Trustees who are not affiliated
with Allmerica Investment, expenses for proxies, prospectuses, and reports to
shareholders, and other expenses.
Pursuant to the Management Agreement with the Trust, Allmerica Investment has
entered into agreements ("Sub-Adviser Agreements") with other investment
advisers ("Sub-Advisers") under which each Sub-Adviser manages the investments
of one or more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund. Allmerica Asset Management, Inc. is an indirect wholly owned
subsidiary of the Company.
For providing its services under the Management Agreement, Allmerica Investment
will receive a fee, computed daily at an annual rate based on the average daily
net asset value of each Fund as follows:
<TABLE>
<CAPTION>
FUND NET ASSET VALUE RATE
- ------------------------------- ----------------- ----------
<S> <C> <C>
Growth Fund First $50 million 0.60%
$50 - 250 million 0.50%
Over $250 million 0.35%
Investment Grade Income Fund First $50 million 0.50%
$50 - 250 million 0.35%
Over $250 million 0.25%
Money Market Fund First $50 million 0.35%
$50 - 250 million 0.25%
Over $250 million 0.20%
Equity Index Fund First $50 million 0.35%
$50 - 250 million 0.30%
Over $250 million 0.25%
Government Bond Fund * 0.50%
Select International Equity * 1.00%
Fund
Select Aggressive Growth Fund * 1.00%
Select Capital Appreciation * 1.00%
Fund
Select Growth Fund * 0.85%
Select Growth and Income Fund * 0.75%
Small Cap Value Fund * 0.85%
</TABLE>
- ------------------------
* For the Government Bond Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Growth Fund, Select Growth and Income Fund and Small
Cap Value Fund, each rate applicable to Allmerica Investment does not vary
according to the level of assets in the Fund.
23
<PAGE>
Allmerica Investment's fee computed for each Fund will be paid from the assets
of such Fund. Allmerica Investment is solely responsible for the payment of all
fees for investment management services to the Sub-Advisers, who will receive
from Allmerica Investment a fee, computed daily at an annual rate based on the
average daily net asset value of each Fund as follows:
<TABLE>
<CAPTION>
SUB-ADVISER FUND NET ASSET VALUE RATE
- --------------------------------- -------------------------- ----------------- ----------
<S> <C> <C> <C>
Miller, Anderson & Sherrerd Growth Fund * *
Allmerica Asset Management, Inc. Investment Grade Income ** 0.20%
Fund
Allmerica Asset Management, Inc. Money Market Fund ** 0.10%
Allmerica Asset Management, Inc. Equity Index Fund ** 0.10%
Allmerica Asset Management, Inc. Government Bond Fund ** 0.20%
Bank of Ireland Asset Management Select International First $50 million 0.45%
Limited Equity Fund Next $50 million 0.40%
Over $100 million 0.30%
Nicholas-Applegate Capital Select Aggressive Growth ** 0.60%
Management Fund
Janus Capital Corporation Select Capital First $100 0.60%
Appreciation Fund million 0.55%
Over $100 million
Putnam Investment Management, Select Growth Fund First $50 million 0.50%
Inc. $50 - 100 million 0.45%
$150 - 250 0.35%
million 0.30%
$250 - 350 0.25%
million
Over $350 million
John A. Levin & Co., Inc. Select Growth and Income First $100 0.40%
Fund million 0.25%
Next $200 million 0.30%
Over $300 million
David L. Babson & Co., Inc. Small Cap Value Fund ** 0.50%
</TABLE>
* Allmerica Investment will pay a fee to Miller, Anderson & Sherrerd based on
the aggregate assets of the Growth Fund and certain other accounts of the
Company and its affiliates (collectively, the "Affiliated Accounts") which
are managed by Miller, Anderson & Sherrerd, under the following schedule:
<TABLE>
<CAPTION>
AGGREGATE AVERAGE NET
ASSETS RATE
- -------------------------- ----------
<S> <C>
First $50 million 0.500%
$50 - 100 million 0.375%
$100 - 500 million 0.250%
$500 - 850 million 0.200%
Over $850 million 0.150%
</TABLE>
** For the Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select Aggressive Growth Fund and Small Cap Value Fund,
each rate applicable to the Sub-Advisers does not vary according to the level
of assets in the Fund.
INVESTMENT ADVISORY SERVICES TO VIP AND VIP II -- For managing investments and
business affairs, each Portfolio pays a monthly fee to Fidelity Management. The
Prospectuses of VIP and VIP II contain additional information concerning the
Portfolios, including information concerning additional expenses paid by the
Portfolios, and should be read in conjunction with this Prospectus.
24
<PAGE>
The Fidelity VIP High Income Portfolio pays a monthly fee to Fidelity Management
at an annual fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by Fidelity Management. On an annual basis this rate
cannot rise above 0.37%, and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month. One-twelfth of the
annual management fee rate is applied to net assets averaged over the most
recent month, resulting in a dollar amount which is the management fee for
that month.
The Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP II Asset
Manager and Fidelity VIP Overseas Portfolios' fee rates are each made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by Fidelity Management. On an annual basis, this rate
cannot rise above 0.52%, and drops as total assets in all these mutual funds
rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP
Equity-Income Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.40%
for the Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity
VIP Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee of as high as 0.82%
of its average net assets. The Fidelity VIP Equity-Income Portfolio may have a
fee of as high as 0.72% of its average net assets. The Fidelity VIP Growth
Portfolio may have a fee of as high as 0.82% of its average net assets. The
Fidelity VIP II Asset Manager Portfolio may have a fee of as high as 0.92% of
its average net assets. The Fidelity VIP Overseas Portfolio may have a fee of as
high as 0.97% of its average net assets. The actual fee rate may be less
depending on the total assets in the funds advised by Fidelity Management.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. The Investment Adviser for the
International Stock Portfolio is Price-Fleming International, Inc.
("Price-Fleming"). Price-Fleming, founded in 1979 as a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is one of
America's largest international mutual fund asset managers with approximately
$20 billion under management in its offices in Baltimore, London, Tokyo and Hong
Kong. To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF -- Each Series of DGPF pays an investment
adviser an annual fee for managing the portfolios and making the investment
decisions for the Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). The
annual fee paid by the International Equity Series is equal to 0.75% of the
average daily net assets of the Series.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Variable Account or the affected Sub-Account, the
Company may withdraw the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Contract interest in a Sub-Account without notice
to the Contract Owner and prior approval of the Commission and state insurance
25
<PAGE>
authorities, to the extent required by the 1940 Act or other applicable law. The
Variable Account may, to the extent permitted by law, purchase other securities
for other contracts or permit a conversion between contracts upon request by a
Contract Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Variable Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required Commission
approval, the Company may, in its sole discretion, establish new Sub-Accounts or
eliminate one or more Sub-Accounts if marketing needs, tax considerations or
investment conditions warrant. Any new Sub-Accounts may be made available to
existing Contract Owners on a basis to be determined by the Company.
Shares of the Underlying Funds are also issued to variable accounts of the
Company and its affiliates which issue variable life Contracts ("mixed
funding"). Shares of the Portfolios are also issued to other unaffiliated
insurance companies ("shared funding"). It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
Contract Owners or variable annuity Contract Owners. Although the Company and
the Underlying Investment Companies do not currently foresee any such
disadvantages to either variable life insurance Contract Owners or variable
annuity Contract Owners, the Company and the respective Trustees intend to
monitor events in order to identify any material conflicts between such Contract
Owners and to determine what action, if any, should be taken in response
thereto. If the Trustees were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may by
appropriate endorsement change the Contract to reflect the substitution or
change and will notify Contract Owners of all such changes. If the Company deems
it to be in the best interest of Contract Owners, and subject to any approvals
that may be required under applicable law, the Variable Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Contract Owners and, after the
Annuity Date, from the Annuitants. Each person having a voting interest in a
Sub-Account will be provided with proxy materials of the Underlying Fund
together with a form with which to give voting instructions to the Company.
Shares for which no timely instructions are received will be voted in proportion
to the instructions which are received. The Company will also vote shares in a
Sub-Account that it owns and which are not attributable to Contracts in the same
proportion. If the 1940 Act or any rules thereunder should be amended or if the
present interpretation of the 1940 Act or such rules should change, and as a
result the Company determines that it is permitted to vote shares in its own
right, whether or not such shares are attributable to the Contract, the Company
reserves the right to do so.
The number of votes which a Contract Owner or Annuitant may cast will be
determined by the Company as of the record date established by the Underlying
Fund. During the accumulation period, the number of Underlying Fund shares
attributable to each Contract Owner will be determined by dividing the dollar
value of the Accumulation Units of the Sub-Account credited to the Contract by
the net asset value of one Underlying Fund share.
During the annuity period, the number of Underlying Fund shares attributable to
each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
26
<PAGE>
CHARGES AND DEDUCTIONS
Deductions under the Contracts and charges against the assets of the
Sub-Accounts are described below. Other deductions and expenses paid out of the
assets of the Underlying Funds are described in the Prospectus and Statement of
Additional Information of the Trust, VIP, VIP II, T. Rowe Price and DGPF.
A. ANNUAL CHARGES AGAINST VARIABLE ACCOUNT ASSETS.
MORTALITY AND EXPENSE RISK CHARGE -- The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contracts. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
phase on all contracts, including those that do not involve a life contingency,
even though the Company does not bear direct mortality risk with respect to
variable annuity settlement options that do not involve life contingencies. The
expense risk arises from the Company's guarantee that the charges it makes will
not exceed the limits described in the Contracts and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE -- The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.20% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity period. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. However, there is no direct relationship between
the amount of administrative expenses imposed on a given contract and the amount
of expenses actually attributable to that contract.
Deductions for the Contract Fee (described under B. CONTRACT FEE) and for the
Administrative Expense Charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contracts include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
B. CONTRACT FEE.
A $30 Contract Fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is $50,000 or
less. The Contract Fee is waived for Contracts issued to and maintained by the
Trustee of a 401(k) plan. Where Contract value has been allocated to more than
one account, a percentage of the total Contract Fee will be deducted from the
Value in each account. The portion of the charge deducted from each account will
be equal to the percentage which
27
<PAGE>
the Value in that account bears to the Accumulated Value under the Contract. The
deduction of the Contract Fee from a Sub-Account will result in cancellation of
a number of Accumulation Units equal in value to the percentage of the charge
deducted from that account.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when purchase payments were
received, the premium tax charge may be deducted on a pro rata basis when
withdrawals are made, upon surrender of the Contract, or when annuity
benefit payments begin (the Company reserves the right instead to deduct
the premium tax charge for these Contracts at the time the purchase
payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law
If no amount for premium tax was deducted at the time the purchase payment was
received, but subsequently tax is determined to be due prior to the Annuity
Date, the Company reserves the right to deduct the premium tax from the
Accumulated Value at the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. However, a contingent deferred sales charge is deducted from the
Accumulated Value of the Contract in the case of surrender and/or withdrawal of
the Contract or at the time annuity benefit payments begin, within certain time
limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the nine years preceding the date of the
surrender; (2) Old Payments -- Accumulated payments not defined as New Payments;
and (3) Earnings -- the amount of Contract Value in excess of all payments that
have not been previously surrendered. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from Old Payments, then from New Payments. Old Payments may be withdrawn
from the Contract at any time without the imposition of a contingent deferred
sales charge. If a withdrawal is attributable all or in part to New Payments, a
contingent deferred sales charge may apply.
CHARGES FOR SURRENDER AND WITHDRAWAL. If a Contract is surrendered, or if New
Payments are withdrawn, while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments to which the
withdrawal is attributed , if any, have remained credited under the Contract.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
28
<PAGE>
The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
CHARGE AS
PERCENTAGE OF
YEARS FROM DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- ------------------------------------------ ------------------------------
<S> <C>
less than-2............................... 8%
3..................................... 7%
4..................................... 6%
5..................................... 5%
6..................................... 4%
7..................................... 3%
8..................................... 2%
9..................................... 1%
Thereafter................................ 0%
</TABLE>
The amount withdrawn equals the amount requested by the Contract Owner plus the
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total contingent deferred sales charge
exceed a maximum limit of 8% of total gross New Payments. Such total charge
equals the aggregate of all applicable contingent deferred sales charges for
surrender, withdrawals, and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Where permitted by law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (a) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (b) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the contract; or (c) physically disabled after
the issue date of the Contract and before attaining age 65. The Company may
require proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits and reserves the right to obtain an examination by a licensed physician
of its choice and at its expense.
For purposes of the above provision, "medical care facility" means any state
licensed facility (or, in a state that does not require licensing a facility
that is operating pursuant to state law), providing medically necessary
inpatient care which is prescribed by a licensed "physician" in writing and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment and is
acting within the scope of that license.
Where contingent deferred sales charges have been waived under any one of the
three situations discussed above, no additional payments under this Contract
will be accepted.
Where permitted by law, no contingent deferred sales charge is imposed (and no
commissions will be paid) on contracts issued where both the Contract Owner and
the Annuitant on the date of issue are within the following class of
individuals: (a) any employee of the Company located at its home office or at
off-site locations if such employees are on the Company's home office payroll;
(b) any director of the Company; (c) any retiree who elected to retire on
his/her retirement date; (d) the immediate family members of those persons
identified in (a) through (c) above residing in the same household; and (e) any
beneficiary who receives a death benefit under a deceased employee's or
retiree's progress sharing plan.
For purposes of the above class of individuals, "the Company" includes
affiliates and subsidiaries; "immediate family members" means children,
siblings, parents and grandparents; "retirement date"
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means an employee's early, normal or late retirement date as defined in the
Company's Pension Plan or any successor plan; and "progress sharing" means the
First Allmerica Financial Life Insurance Company Employee's Incentive and Profit
Sharing Plan or any successor plan.
In addition, from time to time the Company may also reduce the amount of the
contingent deferred sales, the period during which it applies, or both, when
Contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider (a) the size and type of
group; (b) the total amount of payments to be received; and/or (c) other
transactions where sales expenses are likely to be reduced. Any reduction in or
elimination in the amount or duration of the contingent deferred sales charge
will not discriminate unfairly between purchasers of this Contract. The Company
will not make any changes to this charge where prohibited by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charges is modified to effect certain exchanges of annuity
contracts for the Contracts. See Statement of Additional Information.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge Amount") equal to the greatest of (1), (2) or (3):
Where (1) is:
The Accumulated Value as of the Valuation Date coincident with or next
following the date of receipt of the request for withdrawal, reduced by
total gross payments not previously redeemed ("Cumulative Earnings")
Where (2) is:
10% of the Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal, reduced
by the total amount of any prior withdrawals made in the same calendar
year to which no contingent deferred sales charge was applied.
Where (3) is:
The amount calculated under the Company's life expectancy distribution
(see "LED Distributions," below) whether or not the withdrawal was part
of such distribution (applies only if Annuitant is also an Owner).
For example, an 81 year old Contract Owner/Annuitant with an Accumulated Value
of $15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal
Without Surrender Charge Amount of $1,530, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will first be deducted from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the contingent deferred sales charge, if any, until the entire
Withdrawal Without Surrender Charge has been withdrawn. Amounts withdrawn from a
Guarantee Period Account prior to the end of the applicable Guarantee Period
will be subject to a Market Value Adjustment.
LED DISTRIBUTIONS. Prior to the Annuity Date a Contract Owner who is also the
Annuitant may elect to make a series of systematic withdrawals from the Contract
according to a life expectancy distribution ("LED") option, by returning a
properly signed LED request form to the Company's Principal
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Office. The LED option permits the Contract Owner to make systematic withdrawals
from the Contract over his or her lifetime. The amount withdrawn from the
Contract changes each year, because life expectancy changes each year that a
person lives. For example, actuarial tables indicate that a person age 70 has a
life expectancy of 16 years, but a person who attains age 86 has a life
expectancy of another 6.5 years.
If a Contract Owner elects the LED option, in each contract year a fraction of
the Accumulated Value is withdrawn based on the Contract Owner's then life
expectancy. The numerator of the fraction is 1 (one) and the denominator of the
fraction is the remaining life expectancy of the Contract Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. The Contract Owner may elect monthly,
bimonthly, quarterly, semiannual, or annual distributions, and may terminate the
LED option at any time. The Contract Owner may also elect to receive
distributions under an LED option which is determined on the joint life
expectancy of the Contract Owner and a beneficiary. The Company may also offer
other systematic withdrawal options.
If a Contract Owner makes withdrawals under the LED distribution prior to age
59 1/2, the withdrawals may be treated by the IRS as premature distributions
from the Contract. The payments would then be taxed on an "income first" basis,
and be subject to a 10% federal tax penalty. For more information, see "FEDERAL
TAX CONSIDERATIONS," "B. Taxation of the Contracts in General." The LED will
cease on the Annuity Date.
SURRENDERS. In the case of a complete surrender, the amount received by the
Contract Owner is equal to the entire Accumulated Value under the Contract, net
of the applicable contingent deferred sales charge on New Payments, the Contract
Fee and any applicable tax withholding and adjusted for any applicable market
value adjustment. Subject to the same rules that are applicable to withdrawals,
the Company will not assess a contingent deferred sales charge on an amount
equal to the greater of the Withdrawal Without Surrender Charge Amount,
described above, or the life expectancy distribution, if applicable.
Where a Contract Owner who is trustee under a pension plan surrenders, in whole
or in part, a Contract on a terminating employee, the trustee will be permitted
to reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable contingent deferred sales charge. Any
such reallocation will be at the unit values for the Sub-Accounts as of the
valuation date on which a written, signed request is received at the Company's
Principal Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, and important tax considerations, see "Surrender" and "Withdrawal"
under "DESCRIPTION OF THE CONTRACT" and see "FEDERAL TAX CONSIDERATIONS."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. However, a Market
Value Adjustment may apply. See "Guarantee Period Accounts."
If an owner of a fixed annuity Contract issued by the Company wishes to elect a
variable annuity option, the Company may permit such owner to exchange, at the
time of annuitization, the fixed Contract for a Contract offered in this
Prospectus. The proceeds of the fixed Contract, minus any contingent deferred
sales charge applicable under the fixed Contract if a period certain option is
chosen, will be applied towards the variable annuity option desired by the
owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
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E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first twelve transfers in a Contract Year will be free of a
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract Year.
The Contract Owner may have automatic transfers of at least $100 a month made on
a periodic basis (a) from Sub-Account 3 or Sub-Account 5 (which invest in the
Money Market Fund and Government Bond Fund of the Trust, respectively) or from
the Fixed Account to one or more of the other Sub-Accounts or (b) in order to
reallocate Contract Value among the Sub-Accounts. The first automatic transfer
counts as one transfer towards the twelve transfers which are guaranteed to be
free in each contract year. For more information, see "The Contract Transfer
Privilege."
OTHER CHARGES -- Because the Sub-Accounts purchase shares of the Underlying
Funds, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying Funds. The
Prospectus and Statement of Additional Information of the Trust, VIP, VIP II, T.
Rowe Price and DGPF contain additional information concerning expenses of the
Underlying Funds.
SALES EXPENSE. The Company pays sales commissions on the Contracts of up to 5%
(up to 4% on Contracts originally issued as part of a 401(k) plan) of the
payments to registered representatives of Allmerica Investments, Inc. Managers
who supervise the agents will receive overriding commissions ranging up to no
more than 2% of purchase payments.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges, described above,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to Contract Owners or the Variable Account. Any
contingent deferred sales charges assessed on a Contract will be retained by the
Company except for amounts it may pay to Allmerica Investments, Inc. for
services it performs and expenses it may incur as principal underwriter and
general distributor.
DESCRIPTION OF THE CONTRACT
The Contracts are designed for use in connection with several types of
retirement plans as well as for sale to individuals. Participants under such
plans, as well as Contract Owners, Annuitants, and beneficiaries, are cautioned
that the rights of any person to any benefits under such Contracts may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contracts.
The Contracts offered by the Prospectus may be purchased from representatives of
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts, 01653, is indirectly wholly-owned by the Company. The
Contracts also may be purchased from certain independent broker-dealers which
are NASD members.
Contract Owners may direct any inquiries to Annuity Customer Services, First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester,
Massachusetts 01653, 1-800-533-7881.
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements may also include the
proper completion of an application; however, where permitted, the Company may
issue a contract without completion of an application for certain classes of
annuity contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
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The initial net payment will be credited to the contract as of the date that all
underwriting requirements are properly met. If all underwriting requirements are
not complied with within five business days of the Company's receipt of the
initial payment, the payment will be immediately returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding underwriting requirements. Subsequent payments will be credited
as of the Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600
($1,000 in Washington). Under a salary deduction or monthly automatic payment
plan, the minimum initial payment is $50. In all cases, each subsequent payment
must be at least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a contract on the employee, if the plan's
average annual contribution per eligible plan participant is at least $600. The
minimum allocation to a Guarantee Period Account is $1,000. If less than $1,000
is allocated to a Guarantee Period Account, the Company reserves the right to
apply that amount to Sub-Account 3 (the Money Market Fund of the Trust).
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated, or,
if subsequently changed, according to the most recent allocation instructions.
However, any portion of the initial net payment and of additional net payments
received during the contracts's first fifteen days measured from the date of
issue, allocated to any Sub-Account and/or any Guarantee Period Account, will be
held in Sub-Account 3 (the Money Market Fund of the Trust) until the end of the
fifteen day period. Thereafter, these amounts will be allocated as requested.
The Contract Owner may change allocation instruction for new payments pursuant
to a written or telephone request. If telephone requests are elected by the
Contract Owner, a properly completed authorization must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of a Contract Owner identify themselves by name and identify the
Annuitant by name, date of birth and social security number. All transfer
instructions by telephone are tape recorded.
B. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date a Contract Owner may have amounts
transferred among all accounts. Transfer values will be effected at the
Accumulation Value next computed after receipt of the transfer request. The
Company will make transfers pursuant to written or telephone requests. As
discussed in "A. Payments," a properly completed authorization form must be on
file before telephone requests will be honored.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to Sub-Account 3, the Money Market Fund of the Trust.
The Contract Owner may have automatic transfers of at least $100 each made on a
periodic basis from the Money Market Fund or the Government Bond Fund of the
Trust, or from the Fixed Account to one or more of the other Sub-Accounts or
periodically reallocate values among the Sub-Accounts. Automatic transfers or
automatic rebalancing may be made on a monthly, bimonthly, quarterly, semiannual
or annual schedule. The first automatic transfer counts as one transfer towards
the twelve transfers discussed below. Any subsequent automatic transfer will not
count as a transfer for purposes of the charge.
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Currently, the Company makes no charge for transfers. The first twelve (12)
transfers in a Contract year are guaranteed to be free of any transfer charge.
For each subsequent transfer in a Contract year the Company reserves the right
to assess a charge, guaranteed never to exceed $25, to reimburse it for the
expense of processing transfers.
C. SURRENDER.
At any time prior to the Annuity Date, a Contract Owner may surrender the
Contract and receive its Accumulated Value, less applicable charges and adjusted
for any Market Value Adjustment ("Surrender Amount"). The Contract Owner must
return the Contract and a signed, written request for surrender, satisfactory to
the Company, to the Company's Principal Office. The amount payable to the
Contract Owner upon surrender will be based on the Contract's Accumulated Value
as of the Valuation Date on which the request and the Contract are received at
the Company's Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last nine full contract years. See "CHARGES AND DEDUCTIONS." The Contract
Fee will be deducted upon surrender of the Contract.
After the Annuity Date, only Contracts under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option ) may be surrendered. The Surrender Amount is the commuted value
of any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Contract Owners who are participants under Section
403(b) plans or who are participants in the Texas Optional Retirement Program
(Texas ORP) are restricted; see "FEDERAL TAX CONSIDERATIONS," "I. Public School
Systems and Certain Tax Exempt Organizations" and "J. Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
D. WITHDRAWALS.
At any time prior to the Annuity Date, a Contract Owner may withdraw a portion
of the Accumulated Value of his or her Contract, subject to the limits stated
below. The Contract Owner must file a signed, written request for withdrawal,
satisfactory to the Company, at the Company's Principal Office. The written
request must indicate the dollar amount the Contract Owner wishes to receive and
the accounts from which such amount is to be withdrawn. The amount withdrawn
equals the amount requested by the Contract Owner plus any applicable contingent
deferred sales charge, as described under "CHARGES AND DEDUCTIONS." In addition,
amounts redeemed from a Guarantee Period Account prior to the end of the
applicable Guarantee Period will be subject to a Market Value Adjustment, as
described under "GUARANTEE PERIOD ACCOUNTS".
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Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Company's Principal Office.
Each withdrawal must be a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "Surrender."
After the Annuity Date, only Contracts under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Contract
Owners who are participants under Section 403(b) plans or under the Texas ORP,
see "FEDERAL TAX CONSIDERATIONS," "I. Public School Systems and Certain Tax
Exempt Organizations" and "J. Texas Optional Retirement Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
E. DEATH BENEFIT.
If the Annuitant dies (or a Contract Owner predeceases the Annuitant) prior to
the Annuity Date while the Contract is in force, the Company will pay the
beneficiary a death benefit, except where the Contract continues as provided in
"F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY."
Upon death of the Annuitant (including an Owner who is also the Annuitant), the
death benefit is equal to the greatest of (a) the Accumulated Value under the
Contract increased for any positive Market Value Adjustment; (b) gross payments,
reduced proportionately to reflect withdrawals (for each withdrawal, the
proportionate reduction is calculated as the death benefit under this option
immediately prior to the withdrawal multiplied by the withdrawal amount and
divided by the Accumulated Value immediately prior to the withdrawal); or (c)
the death benefit that would have been payable on the most recent Contract
Anniversary, increased for subsequent payments and reduced proportionately to
reflect withdrawals after that date.
If an Owner who is not also the Annuitant dies before the Annuity Date, the
death benefit will be the Accumulated Value increased by any positive Market
Value Adjustment. The death benefit will never be reduced by a negative Market
Value Adjustment. The death benefit will generally be paid to the Beneficiary in
one sum within 7 days of the receipt of due proof of death unless the Owner has
specified a death benefit annuity option. Instead, the Beneficiary may, by
Written Request, elect to:
(a) defer distribution of the death benefit for a period no more than 5
years from the date of death; or
(b) receive a life annuity or an annuity for a period certain not extending
beyond the Beneficiary's life expectancy. Annuity benefit payments must
begin within one year from the date of death.
If distribution of the death benefit is deferred under (a) or (b), any value in
the Guarantee Period Accounts will be transferred to Sub-Account 3 (Money Market
Fund). The excess, if any, of the death benefit over the Accumulated Value will
also be added to Sub-Account 3 (Money Market Fund). The Beneficiary may, by
Written Request, effect transfers and withdrawals during the deferral period and
prior to annuitization under (b), but may not make additional payments. If there
are multiple Beneficiaries, the consent of all is required.
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If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed annuity benefit payments, any unpaid amounts or
installments will be paid to the beneficiary. The Company must pay the remaining
payments at least as rapidly as under the payment option in effect on the date
of the Annuitant's death.
With respect to any death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the Annuitant's
death has been received at the Company's Principal Office. If the beneficiary
elects to receive the death benefit in one sum, the death benefit will be paid
within seven business days. If the beneficiary has not elected an annuity option
within one year from the date notice of death is received by the Company, the
Company will pay the death benefit in one sum. The death benefit will reflect
any earnings or losses experienced during the period and any withdrawals.
F. THE SPOUSE OF THE CONTRACT OWNER AS BENEFICIARY.
The Contract Owner's spouse, if named as the sole beneficiary, may by written
request continue the Contract in lieu of receiving the death benefit. Upon such
election, the spouse will become the Owner and Annuitant subject to the
following: (a) any value in the Guarantee Period Accounts will be transferred to
Sub-Account 3 (Money Market Fund); (b) the excess, if any, of the death benefit
over the Contract's Accumulated Value will also be added to Sub-Account 3 (Money
Market Fund); and (c) additional payments may be made; however, a surrender
charge will apply to these amounts. All other rights and benefits provided in
the Contract will continue, except that any subsequent spouse of such new
Contract Owner will not be entitled to continue the Contract upon such new
Owner's death.
G. ASSIGNMENT.
The Contracts, other than those sold in connection with certain qualified plans,
may be assigned by the Contract Owner at any time prior to the Annuity Date and
while the Annuitant is alive (see "FEDERAL TAX CONSIDERATIONS"). The Company
will not be deemed to have knowledge of an assignment unless it is made in
writing and filed at the Principal Office. The Company will not assume
responsibility for determining the validity of any assignment. If an assignment
of the Contract is in effect on the Annuity Date, the Company reserves the right
to pay to the assignee, in one sum, that portion of the Surrender Value of the
Contract to which the assignee appears to be entitled. The Company will pay the
balance, if any, in one sum to the Contract Owner in full settlement of all
liability under the Contract. The interest of the Contract Owner and of any
beneficiary will be subject to any assignment.
H. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Contract Owner has the
right (1) to select the annuity option under which annuity benefit payments are
to be made, and (2) to determine whether payments are to be made on a fixed
basis, a variable basis, or a combination fixed and variable basis. Annuity
benefit payments are determined according to the annuity tables in the Contract,
by the annuity option selected, and by the investment performance of the
Account(s) selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the Fixed Account of the Company, and the annuity benefit payments will be
fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Accounts is made monthly, quarterly, semiannually or
annually. Since the value of an Annuity Unit in a Sub-Account will reflect the
investment performance of the Sub-Account, the amount of each annuity benefit
payment will vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase these minimum amounts. If the annuity option(s) selected does not
produce an initial payment which meets this minimum, a single payment will be
made. Once the Company begins making annuity benefit payments, the Annuitant
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cannot make withdrawals or surrender the annuity, except in the case where
future annuity benefit payments are limited to a "period certain." Only
beneficiaries entitled to receive remaining payments for a "period certain" may
elect to instead receive a lump sum settlement.
The Annuity Date is selected by the Contract Owner. To the extent permitted in
your state, the Annuity Date may be the first day of any month (a) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Contract is 75 or under, or (b) within 10 years from the date of issue of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Contract Owner may elect to change the
Annuity Date by sending a request to the Company's Principal Office at least one
month before the new Annuity date. The new Annuity Date must be the first day of
any month occurring before the Annuitant's 90th birthday and must be within the
life expectancy of the Annuitant. The Company shall determine such life
expectancy at the time a change in Annuity Date is requested. The Internal
Revenue Code and the terms of qualified plans impose limitations on the age at
which annuity benefit payments may commence and the type of annuity option
selected. See "FEDERAL TAX CONSIDERATIONS" for further information.
If the Contract Owner does not elect otherwise, a variable life annuity with
periodic payments for 10 years guaranteed will be purchased. Changes in either
the Annuity Date or annuity option can be made up to one month prior to the
Annuity Date.
I. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below. Currently,
variable annuity options may be funded through the Growth Fund, the Money Market
Fund, the Equity Index Fund, or the Select Growth and Income Fund.
The Company also provides these same options funded through the Fixed Account
(fixed-amount annuity option). Regardless of how payments were allocated during
the accumulation period, any of the variable annuity options or the fixed-amount
options may be selected, or any of the variable annuity options may be selected
in combination with any of the fixed-amount annuity options. Other annuity
options may be offered by the Company.
A Variable Life Annuity with Payments Guaranteed for 10 years. A variable
annuity payable periodically during the lifetime of the payee with the guarantee
that if the payee should die before all payments have been made, the remaining
annuity benefit payments will continue to the beneficiary.
A Variable Life Annuity payable periodically during the lifetime of the payee
only. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
However, payments will continue during the lifetime of the payee, no matter how
long the payee lives.
A Unit Refund Variable Life Annuity is an annuity payable periodically during
the lifetime of the payee with the guarantee that if (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee,
Joint and Survivor Variable Life Annuity is payable jointly to two payees during
their joint lifetime, and then continuing during the lifetime of the survivor.
The amount of each payment to the survivor is based on the same number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be either the person designated as the Annuitant in the Contract
or the beneficiary. There is no minimum number of payments under this option.
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Joint and Two-thirds Survivor Variable Life Annuity is a variable annuity
payable jointly to two payees during their joint lifetime, and then continuing
thereafter during the lifetime of the survivor. However, the amount of each
periodic payment to the survivor is based upon two-thirds of the number of
Annuity Units which applied during the joint lifetime of the two payees. One of
the payees must be the person designated as the Annuitant in the Contract or the
beneficiary. There is no minimum number of payments under this option.
Period Certain Variable Annuity is a variable annuity, with periodic payments
for a stipulated number of years ranging from one to thirty.
It should be noted that the Period Certain Option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the Period
Certain Option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of
the possible adverse tax consequences of selecting a Period Certain Option.
J. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the Norris decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
K. COMPUTATION OF VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s) selected
by the Contract Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received at the
Company's Principal Office. The number of Accumulation Units resulting from each
payment will remain fixed unless changed by a subsequent split of Accumulation
Unit value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account and will reflect the
investment performance, expenses and charges of its Underlying Funds. The value
of an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. See "GUARANTEE PERIOD ACCOUNTS" and Appendix A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT".
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
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NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (a) by (b) and
subtracting (c) and (d) where:
(a) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(b) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(c) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets, and
(d) is an administrative charge of .15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of Accumulation Unit calculation using a hypothetical
example see "ANNUITY PAYMENTS" in the Statement of Additional Information.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Currently, variable annuity benefit payments are made on the
first of a month based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life options and noncommutable period certain options of 10 or more
years, the annuity value is the Accumulated Value less any premium taxes and
adjusted for any Market Value Adjustment. For commutable period certain options
or any period certain option less than 10 years, the value is the Surrender
Value less any premium tax. For a death benefit annuity, the annuity value will
be the amount of the death benefit. The annuity rates in the Contract are based
on a modification of the 1983 Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. Norris Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3 1/2% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity payment under life annuity
options and non-commutable period certain options of 10 years or more is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if
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any) divided by $1,000, by (2) the applicable amount of the first monthly
payment per $1,000 of value. For commutable period certain options and any
period certain option of less than 10 years, the Surrender Value less premium
taxes, if any, is used rather than the Accumulated Value. The dollar amount of
the first variable annuity benefit payment is then divided by the value of an
Annuity Unit of the selected Sub-Accounts to determine the number of Annuity
Units represented by the first payment. This number of Annuity Units remains
fixed under all annuity options except the joint and two-thirds survivor annuity
option. For each subsequent payment, the dollar amount of the variable annuity
benefit is determined by multiplying this fixed number of Annuity Units by the
value of an Annuity unit on the applicable Valuation Date.
After the first payment, the dollar amount of each periodic variable annuity
benefit payment will vary with subsequent variations in the value of the Annuity
Unit of the selected Sub-Accounts. The dollar amount of each fixed amount
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
The Company may from time to time offer its Contract Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Contract Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY PAYMENTS" in the Statement of Additional
Information.
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 or the Investment Company Act of 1940. Accordingly, the staff of the
Commission has not reviewed the disclosures in this Prospectus relating to the
Guarantee Period Accounts or the Fixed Account. Nevertheless, disclosures
regarding the Guarantee Period Accounts and the Fixed Account of this annuity
Contract or any benefits offered under these accounts may be subject to the
provisions of the Securities Act of 1933 relating to the accuracy and
completeness of statements made in the Prospectus.
INVESTMENT OPTIONS -- In most jurisdictions, there are currently seven Guarantee
Periods available under this Contract with durations of three, five, six, seven,
eight, nine and ten years. Each Guarantee Period Account established for the
Contract Owner is accounted for separately in a non-unitized segregated account.
Each Guarantee Period provides for the accumulation of interest at a Guaranteed
Interest Rate. The Guaranteed Interest Rate on amounts allocated or transferred
to a Guarantee Period Account is determined from time-to-time by the Company in
accordance with market conditions; however, once an interest rate is in effect
for a Guarantee Period Account, the Company may not change it during the
duration of the Guarantee Period. In no event will the Guaranteed Interest Rate
be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract was initially issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
Contract Owners may allocate net payments or make transfers from any of the
Sub-Accounts, the Fixed Account or an existing Guarantee Period Account to
establish a new Guarantee Period Account at any time prior to the Annuity Date.
Transfers from a Guarantee Period Account on any date other than on the day
following the expiration of that Guarantee Period will be subject to a Market
Value Adjustment. The Company establishes a separate investment account each
time the Contract Owner allocates or transfers amounts to a Guarantee Period
except that amounts allocated to the same Guarantee Period on the same day will
be treated as one Guarantee Period Account. The minimum
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that may be allocated to establish a Guarantee Period Account is $1,000. If less
than $1,000 is allocated, the Company reserves the right to apply that amount to
the Money Market Account. The Contract Owner may allocate amounts to any of the
Guarantee Periods available.
At least 45 days, but not more than 75 days prior to the end of a Guarantee
Period, the Company will notify the Contract Owner in writing of the expiration
of that Guarantee Period. At the end of a Guarantee Period the Owner may
transfer amounts to the Sub-Accounts, the Fixed Account or establish a new
Guarantee Period Account of any duration then offered by the Company without a
Market Value Adjustment. If reallocation instructions are not received at the
Principal Office before the end of a Guarantee Period, the Account value will be
automatically applied to a new Guarantee Period Account with the same duration
unless (1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date; or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to Sub-Account 3 (Money Market Fund).
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "Death Benefit." A Market
Value Adjustment will apply to all other transfers, withdrawals, or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
before deduction of any Surrender Charge by the market value factor.
The market value factor for each Guarantee Period Account is equal to:
(1+i)/(1+j)]n/365 -1
where:
i is the Guaranteed Interest Rate expressed as a decimal (for example: 3%
= 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining
in the current Guarantee Period, rounded to the next higher number of
whole years. If that rate is not available, the Company will use a
suitable rate or index allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation Date to the
end of the current Guarantee Period.
If the Guaranteed Interest Rate being credited is lower than the current
Guaranteed Interest Rate, the Market Value Adjustment will decrease the
Guarantee Period Account value. Similarly, if the Guaranteed Interest Rate being
credited is higher than the current Guaranteed Interest Rate, the Market Value
Adjustment will increase the Guarantee Period Account value. The Market Value
Adjustment will never result in a change to the value more than the interest
earned in excess of the Minimum Guarantee Period Account Interest Rate
compounded annually from the beginning of the current Guarantee Period. For
examples of how the Market Value Adjustment works, see Appendix B.
WITHDRAWALS -- Prior to the Annuity Date, the Contract Owner may make
withdrawals of amounts held in the Guarantee Period Accounts. Withdrawals from
these accounts will be made in the same manner and be subject to the same rules
as set forth under "Withdrawals" and "Surrender." In addition, the following
provisions also apply to withdrawals from a Guarantee Period Account: a) a
market value adjustment will apply to all withdrawals, including Withdrawals
Without Surrender Charge, unless made at the end of the Guarantee Period; and b)
the Company reserves the right to
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defer payments of amounts withdrawn from a Guarantee Period Account for up to
six months from the date it receives the withdrawal request. If deferred for 30
days or more, the Company will pay interest on the amount deferred at a rate of
at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a Contingent Deferred Sales
Charge applies to the withdrawal, it will be calculated as set forth under
"Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Contract, on withdrawals or
surrenders, on annuity benefit payments, and on the economic benefit to the
Contract Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the Internal
Revenue Service (IRS).
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER SHOULD ALWAYS BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contracts, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Contract Owners and with respect to each separate account as though that
separate account were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under subchapter L
of the Internal Revenue Code (the "Code"). The Company files a consolidated tax
return with its affiliates.
The Internal Revenue Service has issued regulations relating to the
diversification requirements for variable annuity and variable life insurance
contracts under Section 817(h) of the Code. The regulations provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. If the investments are not adequately diversified, the income on a
contract, for any taxable year of the Contract Owner, would be treated as
ordinary income received or accrued by the Contract Owner. It is anticipated
that the Funds of the Allmerica Investment Trust, the Portfolios of VIP and VIP
II, the Portfolio of T. Rowe Price and the Series of DGPF will comply with the
diversification requirements.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity Contracts,
"qualified" Contracts and "non-qualified" Contracts. A qualified Contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, 408, or 457 of the Code, while a
non-qualified Contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
Contract or a non-qualified Contract. For more information on the tax provisions
applicable to qualified Contracts, see Sections D through J, below.
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B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will, with
certain exceptions (see K below), be considered annuity contracts under Section
72 of the Code. This section provides for the taxation of annuities. The
following discussion concerns annuities subject to Section 72. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same Contract Owner during the same
calendar year be treated as a single contract in determining taxable
distributions under Section 72(e).
With certain exceptions, any increase in the Accumulated Value of the Contract
is not taxable to the Contract Owner until it is withdrawn from the Contract. If
the Contract is surrendered or amounts are withdrawn prior to the Annuity Date,
any withdrawal of investment gain in value over the cost basis of the Contract
would be taxed as ordinary income. Under the current provisions of the Code,
amounts received under a non-qualified Contract prior to the Annuity Date
(including payments made upon the death of the Annuitant or Contract Owner), or
as non-periodic payments after the Annuity Date, are generally first
attributable to any investment gains credited to the Contract over the
taxpayer's basis (if any) in the Contract. Such amounts will be treated as
income subject to federal income taxation.
A 10% penalty tax may be imposed on the withdrawal of investment gains if the
withdrawal is made prior to age 59 1/2. The penalty tax will not be imposed
after age 59 1/2, or if the withdrawal follows the death of the Contract Owner
(or, if the Contract Owner is not an individual, the death of the primary
Annuitant, as defined in the Code), or in the case of the "total disability" (as
defined in the Code) of the Owner. Furthermore, under Section 72 of the Code,
this penalty tax will not be imposed, irrespective of age, if the amount
received is one of a series of "substantially equal" periodic payments made at
least annually for the life or life expectancy of the payee. This requirement is
met when the Contract Owner elects to have distributions made over the Contract
Owner's life expectancy, or over the joint life expectancy of the Contract Owner
and beneficiary. The requirement that the amount be paid out as one of a series
of "substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's life expectancy distribution ("LED") option), and the
option could be changed or terminated at any time, the distributions failed to
qualify as part of a "series of substantially equal payments" within the meaning
of Section 72 of the Code. The distributions were therefore subject to the 10%
federal penalty tax. This Private Letter Ruling may be applicable to a Contract
Owner who receives distributions under the LED option prior to age 59 1/2.
Subsequent private letter rulings, however, have treated LED-type withdrawal
programs as effectively avoiding the 10% penalty tax. The position of the IRS on
this issue is unclear.
If the Contract Owner transfers (assigns) the Contract to another individual as
a gift prior to the Annuity Date, the Code provides that the Contract Owner will
incur taxable income at the time of the transfer. An exception is provided for
certain transfers between spouses. The amount of taxable income upon such
taxable transfer is equal to the excess, if any, of the Surrender Value of the
Contract over the Contract Owner's cost basis at the time of the transfer. The
transfer is also subject to federal gift tax provisions. Where the Contract
Owner and Annuitant are different persons, the change of ownership of the
Contract to the Annuitant on the Annuity Date, as required under the Contract,
is a gift and will be taxable to the Contract Owner as such; however, the
Contract Owner will not incur taxable income. Instead the Annuitant will incur
taxable income upon receipt of annuity benefit payments as discussed below.
When annuity benefit payments are commenced under the Contract, generally a
portion of each payment may be excluded from gross income. The excludable
portion is generally determined by a formula that establishes the ratio that the
cost basis of the Contract bears to the expected return under the Contract. The
portion of the payment in excess of this excludable amount is taxable as
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ordinary income. Once all cost basis in the Contract is recovered, the entire
payment is taxable. If the Annuitant dies before cost basis is recovered, a
deduction for the difference is allowed on the Annuitant's final tax return.
C. TAX WITHHOLDING AND PENALTIES.
The Code requires withholding with respect to payments or distributions from
nonqualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
In certain situations, the Code provides for a tax penalty if, prior to death,
disability or attainment of age 59 1/2, a Contract Owner makes a withdrawal or
receives any amount under the Contract, unless the distribution is in the form
of a life annuity (including life expectancy distributions). The penalty is 10%
of the amount includible in income by the Contract Owner.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.*
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified employer plans, as defined by the Code,
vary according to the type of plan and the terms and conditions of the plan
itself. Therefore, the following is general information about the use of the
Contracts with various types of qualified plans. The rights of any person to any
benefits under such qualified plans will be subject to the terms and conditions
of the qualified plans themselves regardless of the terms and conditions of the
Contract.
A loan to a participant or beneficiary from plans qualified under Sections 401
and 403 or an assignment or pledge of an interest in such a plan is generally
treated as a distribution. This general rule does not apply to loans which
contain certain repayment terms and do not exceed a specified maximum amount, as
required under Section 72(p).
E. QUALIFIED EMPLOYEE PENSION AND PROFIT SHARING TRUSTS AND QUALIFIED ANNUITY
PLANS.
When an employee (including a self-employed individual) or one or more of the
employee's beneficiaries receives a "lump sum" distribution (a distribution from
a qualified plan described in Code Section 401(a) within one taxable year equal
to the total amount payable with respect to such an employee) the taxable
portion of such distribution may qualify for special treatment under a special
five-year income averaging provision of the Code. The employee must have had at
least 5 years of participation under the plan, and the lump sum distribution
must be made after the employee has attained age 59 1/2 or on account of his or
her death, separation from the employer's service (in the case of a common-law
employee) or disability (in the case of a self-employed individual). Such
treatment can be elected for only one taxable year once the individual has
reached age 59 1/2. An employee who attained age 50 before January 1, 1986 may
elect to treat part of the taxable portion of a lump-sum distribution as
long-term capital gains and may also elect 10-year averaging instead of
five-year averaging.
The Company can provide prototype plans for certain of the pension or profit
sharing plans for review by your legal counsel. For information, ask your
financial representative.
F. SELF-EMPLOYED INDIVIDUALS.
The Self-Employed Individuals Tax Retirement Act of 1962, as amended, frequently
referred to as "H.R. 10", allows self-employed individuals and partners to
establish qualified pension and profit sharing trusts and annuity plans to
provide benefits for themselves and their employees.
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These plans generally are subject to the same rules and requirements applicable
to corporate qualified plans, with some special restrictions imposed on
"owner-employees." An "owner-employee" is an employee who (1) owns the entire
interest in an unincorporated trade or business, or (2) owns more than 10% of
either the capital interest or profits interest in a partnership.
G. INDIVIDUAL RETIREMENT ACCOUNT PLANS.
Any individual who earns "compensation" (as defined in the Code and including
alimony payable under a court decree) from employment or self-employment,
whether or not he or she is covered by another qualified plan, may establish an
Individual Retirement Account or Annuity plan ("IRA") for the accumulation of
retirement savings on a tax-deferred basis. Income from investments is not
included in "compensation." The assets of an IRA may be invested in, among other
things, annuity Contracts including the Contracts offered by this Prospectus.
Contributions to the IRA may be made by the individual or on behalf of the
individual by an employer. IRA contributions may be deductible up to the lesser
of (1) $2,000 or (2) 100% of compensation. The deduction is reduced
proportionately for adjusted gross income between $40,000 and $50,000 (between
$25,000 and $35,000 for unmarried taxpayers and between $0 and $10,000 for a
married taxpayer filing separately) if the taxpayer and his or her spouse file a
joint return and either is an active participant in an employer sponsored
retirement plan.
An individual and a working spouse each may have an IRA with the above-described
limit on each. An individual with an IRA may establish an additional IRA for a
non-working spouse if they file a joint return. Contributions to the two IRAs
together are deductible up to the lesser of $2,250 or 100% of compensation.
No deduction is allowed for contributions made for the year in which the
individual attains age 70 1/2 and years thereafter. Contributions for that year
and for years thereafter will result in certain adverse tax consequences.
Non-deductible contributions may be made to IRAs until the year in which the
individual attains age 70 1/2. Although these contributions may not be deducted,
taxes on their earnings are deferred until the earnings are distributed. The
maximum permissible non-deductible contribution is $2,000 for an individual
taxpayer and $2,250 for a taxpayer and non-working spouse. These limits are
reduced by the amount of any deductible contributions made by the taxpayer.
Contributions may be made with respect to a particular year until the due date
of the individual's federal income tax return for that year, not including
extensions. However, for reporting purposes, the Company will regard
contributions as being applicable to the year made unless it receives notice to
the contrary.
All annuity benefit payments and other distributions under an IRA will be taxed
as ordinary income unless the owner has made non-deductible contributions. In
addition, a minimum level of distributions must begin no later than April 1
following the year in which the individual attains age 70 1/2, and failure to
make adequate distributions at this time may result in certain adverse tax
consequences to the individual.
Distributions from all of an individual's IRAs are treated as if they were a
distribution from one IRA and all distributions during the same taxable year are
treated as if they were one distribution. An individual who makes a
non-deductible contribution to an IRA or receives a distribution from an IRA
during the taxable year must provide certain information on the individual's tax
return to enable the IRS to determine the proportion of the IRA balance which
represents non-deductible contributions. If the required information is
provided, that part of the amount withdrawn which is proportionate to the
individual's aggregate non-deductible contributions over the aggregate balance
of all of the individual's IRAs, is excludable from income.
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Distributions which are a return of a non-deductible contribution are
non-taxable, as they represent a return of basis. If the required information is
not provided to the IRS, distributions from an IRA to which both deductible and
non-deductible contributions have been made are presumed to be fully taxable.
H. SIMPLIFIED EMPLOYEE PENSIONS.
Employers may establish Simplified Employee Pensions ("SEPs") under Code Section
408(k) if certain requirements are met. A SEP is an IRA to which the employer
contributes under a written formula. Currently, a SEP may accept employer
contributions each year up to $30,000 or 15% of compensation (as defined),
whichever is less. To establish SEPs the employer must make a contribution for
every employee age 21 and over who has performed services for the employer for
at least three of the five immediately preceding calendar years and who has
earned at least $300 for the year. SEP contributions for employees over age
70 1/2 are permissible.
The employer's contribution is excluded from the employee's gross income for the
taxable year for which it was made up to the $30,000/15% limit. In addition to
the employer's contribution, the employee may contribute 100% of the employee's
earned income, up to $2,000, to the SEP, but such contributions will be subject
to the rules described above in "G. Individual Retirement Account Plans."
These plans are subject to the general employer's deduction limitations
applicable to all corporate qualified plans.
I. PUBLIC SCHOOL SYSTEMS AND CERTAIN TAX-EXEMPT ORGANIZATIONS.
Under the provisions of Section 403(b) of the Code, payments made for annuity
Contracts purchased for employees under annuity plans adopted by public school
systems and certain organizations which are tax exempt under Section 501(c)(3)
of the Code are excludable from the gross income of such employees to the extent
that the aggregate purchase payments for such annuity Contracts in any year do
not exceed the maximum contribution permitted under the Code.
A Contract qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) may not begin before the employee
attains age 59 1/2, separates from service, dies, or becomes disabled. In the
case of hardship a Contract Owner may withdraw amounts contributed by salary
reduction, but not the earnings on such amounts. Even though a distribution may
be permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax. The distribution restrictions are
effective for years beginning after December 31, 1988, but only with respect to
amounts that were not held under the Contract as of that date.
J. TEXAS OPTIONAL RETIREMENT PROGRAM.
Under a Code Section 403(b) annuity contract issued as a result of participation
in the Texas Optional Retirement Program, distributions may not be received
except in the case of the participant's death, retirement or termination of
employment in the Texas public institutions of higher education. These
restrictions are imposed by reason of an opinion of the Texas Attorney General
interpreting the Texas laws governing the Optional Retirement Program.
K. SECTION 457 PLANS FOR STATE GOVERNMENTS AND TAX-EXEMPT ENTITIES.
Code Section 457 allows employees of a state, one of its political subdivisions,
or certain tax-exempt entities to participate in eligible government deferred
compensation plans. An eligible plan, by its terms, must not allow deferral of
more than $7,500 or 33 1/3% of a participant's includible compensation for the
taxable year, whichever is less. Includible compensation does not include
amounts excludable under the eligible deferred compensation plan or amounts paid
into a Code Section 403(b) annuity. The amount a participant may defer must be
reduced dollar-for-dollar by elective deferrals
46
<PAGE>
under a SEP, 401(k) plan or a deductible employee contribution to a 501(c)(18)
plan. Under eligible deferred compensation plans the state, political
subdivision, or tax-exempt entity will be owner of the Contract.
If an employee also participates in another eligible plan or contributes to a
Code Section 403(b) annuity, a single limit of $7,500 will be applied for all
plans. Additionally, the employee must designate how much of the $7,500 or
33 1/3% limitation will be allocated among the various plans. Contributions to
an eligible plan will serve to reduce the maximum exclusion allowance for a Code
Section 403(b) annuity. Amounts received by employees under such plans generally
are includible in gross income in the year of receipt.
L. NON-INDIVIDUAL OWNERS.
Non-individual Owners (e.g., a corporation) of deferred annuity contracts
generally will be currently taxed on any increase in the cash surrender value of
the deferred annuity attributable to contributions made after February 28, 1986.
This rule does not apply to immediate annuities or to deferred annuities held by
a qualified pension plan, an IRA, a 403(b) plan, estates, employers with respect
to terminated pension plans, or a nominee or agent holding a contract for the
benefit of an individual. Corporate-owned annuities may result in exposure to
the alternative minimum tax, to the extent that income on the annuities
increases the corporation's adjusted current earnings.
REPORTS
A Contract Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company will also furnish an annual
report to the Contract Owner containing a statement of his or her account,
including unit values and other information as required by applicable law, rules
and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA contracts (i.e. contracts issued under
Section 403(b) of the Internal Revenue Code and to contracts issued to plans
qualified under Sections 401(a) and 401(k) of the Code. Loans are subject to
provisions of the Code and to applicable qualified retirement plan rules. Tax
advisors and plan fiduciaries should be consulted prior to exercising loan
privileges.
Loaned amounts will first be withdrawn from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
(last-in, first-out) within each duration), subject to any applicable Market
Value Adjustments. The maximum loan amount will be determined under the
Company's maximum loan formula. The minimum loan amount is $1,000. Loans will be
secured by a security interest in the contract and the amount borrowed will be
transferred to a loan asset account within the Company's General Account, where
it will accrue interest at a specified rate below the then-current loan rate.
Generally, loans must be repaid within five years or less and repayments must be
made quarterly and in substantially equal amounts. Repayments will be allocated
pro-rata in accordance with the most recent payment allocation, except that any
allocations to a Guarantee Period Account will instead be allocated to the Money
Market Sub-Account.
CHANGES IN OPERATION OF THE VARIABLE ACCOUNT
The Company reserves the right, subject to compliance with applicable law, to
(1) transfer assets from the Variable Account or Sub-Account to another of the
Company's separate accounts or Sub-Accounts having assets of the same class, (2)
to operate the variable account or any Sub-Account as a management investment
company under the 1940 Act or in any other form permitted by law, (3) to
deregister the Variable account under the 1940 Act in accordance with the
requirements of the 1940 Act and (4) to substitute the shares of any other
registered investment company for the Underlying Fund
47
<PAGE>
shares held by a Sub-Account, in the event that Underlying Fund shares are
unavailable for investment, or if the Company determines that further investment
in such Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account, (5) to change the methodology for determining the net investment
factor , and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described above be made without notice to
Contract Owners in accordance with the 1940 Act.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the Securities and Exchange Commission. Certain
portions of the Registration Statement and amendments have been omitted in this
Prospectus pursuant to the rules and regulations of the Commission. The omitted
information may be obtained from the Commission's principal office in
Washington, D.C., upon payment of the Commission's prescribed fees.
48
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
The Fixed Account is made up of all of the general assets of the Company other
than those allocated to the separate accounts. Allocations to the Fixed Account
become part of the assets of the Company and are used to support insurance and
annuity obligations. A portion or all of net purchase payments may be allocated
to accumulate at a fixed rate of interest in the Fixed Account. Such net amounts
are guaranteed by the Company as to principal and a minimum rate of interest.
Under the Contracts, the minimum interest which may be credited on amounts
allocated to the Fixed Account is 3% compounded annually. Additional "Excess
Interest" may or may not be credited at the sole discretion of the Company.
If a Contract is surrendered, or if an Excess Amount is withdrawn, while the
Contract is in force and before the Annuity Date, a contingent deferred sales
charge is imposed if such event occurs before the payments attributable to the
surrender or withdrawal have been credited to the Contract less than seven full
contract years.
49
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume there are no withdrawals and that the Withdrawal
Without Surrender Charge amount is equal to the greater of 10% of the current
Accumulated Value, or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender, based
on Hypothetical Accumulated Values:
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL WITHOUT SURRENDER
ACCOUNT ACCUMULATED SURRENDER CHARGE CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- --------------- -------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 5,400.00 8% $ 3,672.00
2 58,320.00 8,320.00 8% 3,965.76
3 62,985.60 12,985.60 7% 3,500.00
4 68,024.45 18,024.45 6% 3,000.00
5 73,466.40 23,466.40 5% 2,500.00
6 79,343.72 29,343.72 4% 2,000.00
7 85,691.21 35,691.21 3% 1,500.00
8 92,546.51 42,546.51 2% 1,000.00
9 99,950.23 49,950.23 1% 500.00
10 107,946.25 57,946.25 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the Date of Issue and no additional
payments are made. Assume that the Withdrawal Without Surrender Charge amount is
equal to the greater of 10% of the current Accumulated Value or the accumulated
earnings in the contract and there are withdrawals as detailed below. The table
below presents examples of the surrender charge resulting from withdrawals,
based on Hypothetical Accumulated Values:
<TABLE>
<CAPTION>
WITHDRAWAL
HYPOTHETICAL WITHOUT SURRENDER
ACCOUNT ACCUMULATED SURRENDER CHARGE CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- --------------- ------------- ------------- ---------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 5,400.00 8% $ 0.00
2 58,320.00 0.00 8,320.00 8% 0.00
3 62,985.60 0.00 12,985.60 7% 0.00
4 68,024.45 30,000.00 18,024.45 6% 718.53
5 41,066.40 10,000.00 4,106.68 5% 192.00
6 33,551.72 5,000.00 3,357.17 4% 0.00
7 30,835.85 10,000.00 3,083.59 3% 161.24
8 22,502.72 15,000.00 2,250.27 2% 232.49
9 8,102.94 0.00 810.29 1% 0.00
10 8,571.17 0.00 875.12 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)]n/365-1
The following examples assume:
1. The payment was allocated to a ten year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers of withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
50
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.10)]2555/365-1
= (.98182)(7)-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054*$62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.07)]2555/365-1
= (1.0093)(7)-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694*$62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.11)]n/365-1
= (.97297)(7)-1
= - .17454
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the
negative of the excess interest earned
over 3%
= Minimum (-.17454*$62,985.60 or -$8,349.25)
= Minimum-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)(7)-1
= .13981
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the
excess interest earned over 3%
= Minimum of .13981*$62,985.60 or $8,349.25)
= Minimum of $8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
51
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
for
Individual Variable Annuity Policy Funded through Sub-Accounts of
Variable Account VA-K
Investing in shares of Allmerica Investment Trust, Variable Insurance Products
Fund, Variable Insurance Products Fund II, T. Rowe Price International Series,
Inc. and Delaware Group Premium Fund, Inc.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS OF THE VARIABLE ACCOUNT DATED JULY 8, 1996,
("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CUSTOMER
SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440 LINCOLN STREET,
WORCESTER, MASSACHUSETTS 01653
DATED JULY 8, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY............................................ 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY.................................................................... 3
SERVICES................................................................... 3
UNDERWRITERS............................................................... 3
ANNUITY PAYMENTS........................................................... 4
PERFORMANCE INFORMATION.................................................... 5
FINANCIAL STATEMENTS....................................................... 9
GENERAL INFORMATION AND HISTORY
Separate Account VA-K ("Variable Account") is a separate investment account of
First Allmerica Financial Life Insurance Company ("the Company") established
pursuant to a vote of the Board of Directors on August 20, 1991. The Company's
principal office is located at 440 Lincoln Street, Worcester, Massachusetts
01653. The Company was originally organized as a mutual life insurance company
under the laws of Massachusetts in 1844, and was known as State Mutual Life
Assurance Company of America. On October 13, 1995, the Company converted from a
mutual life insurance company to a stock life insurance company and adopted its
present name. At that time the Company also became a wholly-owned subsidiary of
Allmerica Financial Corporation, 440 Lincoln Street, Worcester, Massachusetts.
Currently, 18 Sub-Accounts of the Variable Account are available under the
Policy. Each Sub-Account invests in a corresponding investment portfolio of
Allmerica Investment Trust ("Trust"), Variable Insurance Products Fund ("VIP"),
Variable Insurance Products Fund II ("VIP II"), T. Rowe Price International
Series, Inc. ("T. Rowe Price") or Delaware Group Premium Fund, Inc. ("DGPF").
The Trust, VIP, VIP II, T. Rowe Price and DGPF are open-end, diversified series
investment companies. Eleven different funds of the Trust are available under
the Policy: the Growth Fund, Investment Grade Income Fund, Money Market Fund,
Equity Index Fund, Government Bond Fund, Select International Equity Fund,
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth
Fund, Select Growth and Income Fund and Small Cap Value Fund of Allmerica
Investment Trust. Four of the portfolios of VIP are available under the
Policies: the Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas Portfolio.
One of the portfolios of VIP is available under the Policies: the Fidelity
VIP II Asset Manager Portfolio. One portfolio of T. Rowe Price is available
under the Policies: the T. Rowe Price International Stock Portfolio. One of the
series of DGPF is available under the Policies: the International Equity
Series. Each Fund, Portfolio and Series available under the Policies (together,
the "Underlying Funds") has its own investment objectives and certain attendant
risks.
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<PAGE>
TAXATION OF THE CONTRACTS, VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Policy, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any other
taxes that may become payable in the future in connection with the Contracts or
the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a mutual life insurance company under
subchapter L of the Code and files a consolidated tax return with its affiliated
companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of Policy or the Separate Account may have upon its tax.
Such charge for taxes, if any, will be assessed on a fair and equitable basis in
order to preserve equity among classes of Contract Owners. The Variable Account
presently is not subject to tax.
SERVICES
Custodian of Securities. The Company serves as custodian of the assets of the
Variable Account. Underlying Fund shares owned by the Sub-Accounts are held on
an open account basis. A Sub-Account's ownership of Underlying Fund shares is
reflected on the records of the Underlying Fund and not represented by any
transferable stock certificates.
Experts. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995 and
of Variable Account VA-K, ExecAnnuity Plus of First Allmerica Financial Life
Insurance Company as of December 31, 1995 and for the periods indicated,
included in this Statement of Additional Information constituting part of the
Registration Statement, have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
UNDERWRITERS
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD), serves as principal underwriter and general distributor
for the Policy pursuant to a contract between Allmerica Investments, Inc., the
Company and the Variable Account. Allmerica Investments, Inc. distributes the
Policies on a best efforts basis. Allmerica Investments, Inc., 440 Lincoln
Street, Worcester, Massachusetts 01653 was organized in 1969 as a wholly-owned
subsidiary of the Company and is, at present, wholly-owned by the Company.
The Policy offered by this Prospectus are offered continuously and may be
purchased from NASD registered representatives of Allmerica Investments, Inc.
and from certain independent broker-dealers which are NASD members and whose
representatives are authorized by applicable law to sell variable annuity
policy.
Commissions are paid by the Company to its licensed insurance agents on sales of
the Policy. The Company intends to recoup the commission and other sales
expense through a combination of anticipated surrender, withdrawal and/or
annuitization charges, the investment earnings on amounts allocated to
accumulate on a fixed basis in excess of the interest credited on fixed
accumulations by the Company, and the profit, if any, from the mortality and
expense risk charge.
All persons selling the Policy are required to be licensed by their
respective state insurance authorities for the sale of variable annuity policy.
Registered representatives of Allmerica Investments, Inc. receive commissions of
up to 5% (4% on policy originally issued as part of a 401(k) plan) of purchase
payments. Managers who supervise the agents
-3-
<PAGE>
will receive overriding commissions ranging up to no more than 2% of purchase
payments. Independent broker-dealers receive commissions of 5%, a portion of
which is paid to their registered representatives.
The aggregate amount of commissions paid to representatives of Allmerica
Investments, Inc. with respect to sales of the Contracts in 1995 was
$944,269.00.
Commissions are paid by the Company and do not result in any charge to Contract
Owners or to the Separate Account in addition to the charges described under
"CHARGES AND DEDUCTIONS" in the Prospectus.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Policy is determined is
described in detail under "K. Computation of Policy Values and Annuity Payments"
in the Prospectus.
Illustration of Accumulation Unit Calculation Using Hypothetical Example. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value - Previous Valuation Period.............. $ 1.135000
(2) Value of Assets - Beginning of Valuation Period.................. $5,000,000
(3) Excess of investment income and net gains over capital losses.... $1,675
(4) Adjusted Gross Investment Rate for the valuation period (3):(2).. 0.000335
(5) Annual Charge (one day equivalent of 1.45% per annum)............ 0.000039
(6) Net Investment Rate (4)-(5)...................................... 0.000296
(7) Net Investment Factor 1.000000 + (6)............................. 1.000296
(8) Accumulation Unit Value - Current Period (1)x(7)................. $ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity payments is described in detail
under "K. Computation of Policy Values and Annuity Payments" in the Prospectus.
Illustration of Variable Annuity Payment Calculation Using Hypothetical Example.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Annuitant has
40,000 Accumulation Units in a Separate Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity payment is $1.120000. Therefore, the Accumulation Value
of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Contract
Owner elects an option for which the first monthly payment is $6.57 per $1,000
of Accumulated Value applied. Assuming no premium tax or contingent deferred
sales charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3-1/2% per
annum for the Valuation Date as of which
-4-
<PAGE>
the first payment was calculated was $1.100000. Annuity Unit values will not be
the same as Accumulation Unit values because the former reflect the 3-1/2%
assumed interest rate used in the annuity rate calculations. When the Annuity
Unit value of $1.100000 is divided into the first monthly payment the number of
Annuity Units represented by that payment is determined to be 267.5818. The
value of this same number of Annuity Units will be paid in each subsequent month
under most options. Assume further that the net investment factor for the
Valuation Period applicable to the next annuity payment is 1.000190. Multiplying
this factor by .999906 (the one-day adjustment factor for the assumed interest
rate of 3-1/2% per annum) produces a factor of 1.000096. This is then multiplied
by the Annuity Unit value on the immediately preceding Valuation Date (assumed
here to be $1.105000). The result is an Annuity Unit value of $1.105106 for the
current monthly payment. The current monthly payment is then determined by
multiplying the number of Annuity Units by the current Annuity Unit value, or
267.5818 times $1.105106, which produces a current monthly payment of $295.71.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other materials information on
various topics of interest to Contract Owners and prospective Contract
Owners. These topics may include the relationship between sectors of the economy
and the economy as a whole and its effect on various securities markets,
investment strategies and techniques (such as value investing, market timing,
dollar cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning, and
investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Policy and the characteristics
of and market for such financial instruments.
The Policy has been offered since 1996. However, total return data and
supplemental total return information may be advertised based on the period
of time that the Underlying Funds have been in existence. The results for any
period prior to the Contracts being offered will be calculated as if the Policy
had been offered during that period of time, with all charges assumed to be
those applicable to the Policy.
Total Return
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Accounts asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. The quotations are computed by
finding the average annual compounded rates of return over the specified periods
that would equate the initial amount invested to the ending redeemable values,
according to the following formula:
P(1 + T) to the power of n = ERV
Where: P = a hypothetical initial payment to the Separate Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end of
the specified period
-5-
<PAGE>
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.45% on an annual basis. The calculation of
ending redeemable value assumes (1) the policy was issued at the beginning of
the period and (2) a complete surrender of the policy at the end of the period.
The deduction of the contingent deferred sales charge, if any, applicable at the
end of the period is included in the calculation, according to the following
schedule:
Years from date of purchase Charge as percentage of
payment to date of withdrawal New Purchase Payments withdrawn*
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
*Subject to the maximum limit described in the prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all Policy years, an amount equal to 10% of the Accumulated
Value under the Policy (or a greater amount under a life expectancy distribution
option, if applicable) is not subject to the contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 Annual Policy
fee.
-6-
<PAGE>
Supplemental Total Return Information
The Supplemental Total Return information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
P(1 + T) to the power of n = EV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the
specified period
-7-
<PAGE>
The calculation of Supplemental Total Return reflects the 1.45% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the policy
is NOT withdrawn at the end of the specified period, and there is therefore no
adjustment for the contingent deferred sales charge that would be applicable if
the contract was withdrawn at the end of the period. The calculations of
Supplemental Total Return includes the deduction of the $30 Annual Policy fee.
-8-
<PAGE>
Yield and Effective Yield - Sub-Account 3 (invests in
the Money Market Fund of the Trust)
Set forth below is yield and effective yield information for Sub-Account 3 for
the seven-day period ended December 31, 1995:
Yield 5.69%
Effective Yield 5.53%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. Under those
methods, the yield quotation is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one accumulation unit of the Sub-Account at the
beginning of the period, subtracting a charge reflecting the annual 1.45%
deduction for mortality and expense risk and the administrative charge, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
Sub-Account 3 computes effective yield by compounding the unannualized base
period return by using the formula:
Effective Yield = [(base period return + 1)(365/7)] - 1
The calculations of yield and effective yield do not reflect the $30 Annual
Policy fee.
FINANCIAL STATEMENTS
Financial Statements are included for the Company and for the Sub-Accounts of
Separate Account VA-K investing in the Underlying Funds.
-9-
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
(formerly known as State Mutual Life Assurance Company of America)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December
31, 1995 and 1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments
(Notes 1 and 3) and postemployment benefits (Notes 11) in 1994 and for
postretirement benefits (Note 10) in 1993.
/s/ Price Waterhouse LLP
Boston, Massachusetts
February 5, 1996
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions, except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 2,222.8 $ 2,181.8 $ 2,079.3
Universal life and investment product policy fees 170.4 156.8 143.7
Net investment income 710.1 743.1 782.8
Net realized investment gains 19.1 1.1 61.0
Realized gain on sale of subsidiary -- -- 35.7
Realized gain on sale of mutual fund processing business 20.7 -- --
Realized gain on issuance of subsidiary common stock -- -- 62.9
Other income 95.4 112.3 73.8
----------------------------------------
Total revenues 3,238.5 3,195.1 3,239.2
----------------------------------------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses 2,008.3 2,047.0 1,987.2
Policy acquisition expenses 470.3 475.7 435.8
Other operating expenses 455.0 518.9 421.3
----------------------------------------
Total benefits, losses and expenses 2,933.6 3,041.6 2,844.3
----------------------------------------
Income before federal income taxes 304.9 153.5 394.9
----------------------------------------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current 119.7 45.4 95.1
Deferred (37.0) 8.0 (20.4)
----------------------------------------
Total federal income tax expense 82.7 53.4 74.7
----------------------------------------
Income before minority interest, extraordinary item, and
cumulative effect of accounting change 222.2 100.1 320.2
Minority interest (73.1) (51.0) (122.8)
----------------------------------------
Income before extraordinary item and cumulative effect of
accounting changes 149.1 49.1 197.4
Extraordinary item - demutualization expenses (12.1) (9.2) (4.6)
Cumulative effect of changes in accounting principles -- (1.9) (35.4)
----------------------------------------
Net income $ 137.0 $ 38.0 $ 157.4
----------------------------------------
----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(In millions, except per share data) 1995 1994
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at amortized cost (fair value of $949.9 in 1994) $ -- $ 959.3
Fixed maturities-at fair value (amortized cost of $7,467.9 and $6,724.6) 7,739.3 6,512.0
Equity securities-at fair value (cost of $410.6 and $260.4) 517.2 286.4
Mortgage loans 799.5 1,106.7
Real estate 179.6 180.3
Policy loans 123.2 364.9
Other long-term investments 71.9 68.1
-------------------------------
Total investments 9,430.7 9,477.7
-------------------------------
Cash and cash equivalents 236.6 539.7
Accrued investment income 163.0 186.6
Deferred policy acquisition costs 735.7 802.8
-------------------------------
Reinsurance receivables:
Future policy benefits 97.1 59.7
Outstanding claims, losses and loss adjustment expenses 799.6 741.0
Unearned premiums 43.8 61.9
Other 58.9 62.1
-------------------------------
Total reinsurance receivables 999.4 924.7
-------------------------------
Deferred federal income taxes 81.2 189.1
Premiums, accounts and notes receivable 526.7 510.3
Other assets 361.4 324.9
Closed Block assets 818.9 --
Separate account assets 4,348.8 2,965.7
-------------------------------
Total assets $ 17,702.4 $ 15,921.5
-------------------------------
-------------------------------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,639.3 $ 3,416.4
Outstanding claims, losses and loss adjustment expenses 3,081.3 2,991.5
Unearned premiums 800.9 796.6
Contractholder deposit funds and other policy liabilities 2,737.4 3,435.7
-------------------------------
Total policy liabilities and accruals 9,258.9 10,640.2
-------------------------------
Expenses and taxes payable 600.3 589.2
Reinsurance premiums payable 42.0 65.8
Short-term debt 28.0 32.8
Deferred federal income taxes 47.8 13.8
Long-term debt 2.8 2.7
Closed Block liabilities 902.0 --
Separate account liabilities 4,337.8 2,954.9
-------------------------------
Total liabilities 15,219.6 14,299.4
-------------------------------
Minority interest 758.5 629.7
Commitments and contingencies (Notes 14 and 19)
SHAREHOLDERS' EQUITY
Common stock, $10 par value, 1 million shares authorized, 500,000
shares issued and outstanding 5.0 --
Additional paid-in-capital 392.4 --
Unrealized appreciation (depreciation) on investments, net 153.0 (79.0)
Retained earnings 1,173.9 1,071.4
-------------------------------
Total shareholders' equity 1,724.3 992.4
-------------------------------
Total liabilities and shareholders' equity $ 17,702.4 $ 15,921.5
-------------------------------
-------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ -- $ -- $ --
Demutualization transaction 5.0 -- --
----------------------------------------
Balance at end of year 5.0 -- --
----------------------------------------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year -- -- --
Contributed from parent 392.4 -- --
----------------------------------------
Balance at end of year 392.4 -- --
----------------------------------------
RETAINED EARNINGS
Balance at beginning of year 1,071.4 1,033.4 876.0
Net income prior to demutualization 93.2 38.0 157.4
----------------------------------------
1,164.6 1,071.4 1,033.4
Demutualization transaction (34.5) -- --
Net income subsequent to demutualization 43.8 -- --
----------------------------------------
Balance at end of year 1,173.9 1,071.4 1,033.4
----------------------------------------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Balance at beginning of year (79.0) 17.5 20.6
----------------------------------------
Cumulative effect of accounting change:
Net appreciation on available-for-sale debt securities -- 296.1 --
Provision for deferred federal income taxes and minority interest -- (149.1) --
----------------------------------------
-- 147.0 --
----------------------------------------
Effect of transfer of securities from held-to-maturity to available-for-sale:
Net appreciation on available-for-sale debt securities 22.4 -- --
Provision for deferred federal income taxes and minority interest (9.6) -- --
----------------------------------------
12.8 -- --
----------------------------------------
Appreciation (depreciation) during the period:
Net appreciation (depreciation) on available-for-sale securities 466.0 (492.1) (9.6)
(Provision) benefit for deferred federal income taxes (163.1) 171.9 2.8
Minority interest (83.7) 76.7 3.7
----------------------------------------
219.2 (243.5) (3.1)
----------------------------------------
Balance at end of year 153.0 (79.0) 17.5
----------------------------------------
Total shareholders' equity $1,724.3 $ 992.4 $ 1,050.9
----------------------------------------
----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 137.0 $ 38.0 $ 157.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 73.1 50.1 112.7
Net realized gains (39.8) (1.1) (159.6)
Deferred federal income taxes (benefits) (37.0) 8.0 (20.4)
Increase in deferred policy acquisition costs (38.4) (34.6) (51.8)
Increase in premiums and notes receivable, net of reinsurance payable (42.0) (25.6) (37.5)
(Increase) decrease in accrued investment income 7.0 4.6 (1.6)
Increase in policy liabilities and accruals, net 116.2 175.9 131.7
(Increase) decrease in reinsurance receivable (75.6) (31.9) 18.6
Increase in expenses and taxes payable 7.5 88.0 104.7
Separate account activity, net (0.1) 0.4 21.4
Other, net 23.9 59.9 2.7
-----------------------------------------
Net cash provided by operating activities 131.8 331.7 278.3
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale
fixed maturities 2,738.4 2,097.8 --
Proceeds from disposals of held-to-maturity fixed maturities 271.3 304.4 2,094.9
Proceeds from disposals of equity securities 120.0 143.9 585.8
Proceeds from disposals of other investments 40.5 25.9 74.0
Proceeds from mortgages matured or collected 230.3 256.4 291.2
Purchase of available-for-sale fixed maturities (3,273.3) (2,150.1) --
Purchase of held-to-maturity fixed maturities -- (111.6) (2,577.1)
Purchase of equity securities (254.0) (172.2) (673.3)
Purchase of other investments (24.8) (26.6) (46.5)
Proceeds from sale of businesses 32.9 -- 79.5
Capital expenditures (14.1) (43.1) (37.5)
Other investing activities, net 4.7 2.4 1.3
-----------------------------------------
Net cash (used in) provided by investing activities (128.1) 327.2 (207.7)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 445.8 786.3 738.7
Withdrawals from contractholder deposit funds (1,069.9) (1,187.0) (894.0)
Change in short-term debt (4.8) (6.0) 1.4
Change in long-term debt 0.2 0.3 --
Dividends paid to minority shareholders (4.1) (4.2) (3.9)
Capital contributed from parent 392.4 -- 156.2
Payments for policyholders' membership interests (27.9) -- --
Net proceeds from issuance of long-term debt -- -- --
Other, net (20.9) -- (1.3)
-----------------------------------------
Net cash used in financing activities (289.2) (410.6) (2.9)
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (285.5) 248.3 67.7
Net change in cash held in the Closed Block (17.6) -- --
Cash and cash equivalents, beginning of year 539.7 291.4 223.7
-----------------------------------------
Cash and cash equivalents, end of year $ 236.6 $ 539.7 $ 291.4
-----------------------------------------
-----------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 4.1 $ 4.3 $ 1.7
Income taxes paid $ 90.6 $ 46.1 $ 57.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company",
formerly State Mutual Life Assurance Company of America ["State Mutual"]) was
organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of
reorganization effective October 16, 1995 and became a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). The consolidated
financial statements have been prepared as if FAFLIC were organized as a
stock life insurance company for all periods presented. Thus, generally
accepted accounting principles for stock life insurance companies have been
applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly
SMA Life Assurance Company) its wholly owned life insurance subsidiary,
non-insurance subsidiaries (principally brokerage and investment advisory
subsidiaries), and Allmerica Property and Casualty Companies, Inc.
("Allmerica P&C", a 58.3%-owned non-insurance holding company). The Closed
Block assets and liabilities at December 31, 1995 and its results of
operations subsequent to demutualization are presented in the consolidated
financial statements as single line items. Prior to demutualization such
amounts are presented line by line in the consolidated financial statements
(see Note 6). Unless specifically stated, all disclosures contained herein
supporting the consolidated financial statements as of December 31, 1995 and
the year then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C
and its only significant subsidiary, The Hanover Insurance Company
("Hanover"). Hanover's 81.1%-owned subsidiary is Citizens Corporation, the
holding company for Citizens Insurance Company of America ("Citizens").
Minority interest also includes an amount related to the minority interest in
Citizens Corporation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policy
included therein, consisting of certain individual life insurance participating
policy, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policy constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policy and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policy are in force. On
October 16, 1995, FAFLIC allocated to the Closed Block assets in an amount that
is expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy benefits, certain future
expenses and taxes and for continuation of policyholder dividend scales payable
in 1994 so long as the experience underlying such dividend scales continues. The
Company expects that the factors underlying such experience will fluctuate in
the future and policyholder dividend scales for Closed Block Business will be
set accordingly.
Although the assets and income allocated to the Closed Block inure solely
to the benefit of the holders of policy included in the Closed Block, the
excess of Closed Block liabilities over Closed Block assets at October 16, 1995
measured on a GAAP basis represent the expected future post-tax income from the
Closed Block which may be recognized in income over the period the policy and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or
exceeds the expected income for such period as determined at October 16, 1995,
the expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policy and contracts in the Closed Block remain
in force, the actual income from the Closed Block is less than the expected
income from the Closed Block, only such actual income
5
<PAGE>
(which could reflect a loss) would be recognized in income. If the actual income
from the Closed Block in any given period is less than the expected income for
that period and changes in dividends scales are inadequate to offset the
negative performance in relation to the expected performance, the income inuring
to shareholders of the Company will be reduced. If a policyholder dividend
liability had been previously established in the Closed Block because the actual
income to the relevant date had exceeded the expected income to such date, such
liability would be reduced by this reduction in income (but not below zero) in
any periods in which the actual income for that period is less than the expected
income for such period.
C. VALUATION OF INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). SFAS No. 115 requires that an
enterprise classify debt and equity securities into one of three categories;
held-to-maturity, available-for-sale, or trading. Investments classified as
held-to-maturity shall be investments that the enterprise has the positive
intent and ability to hold until maturity. Trading securities are investments
which are bought and held principally for the purpose of selling them in the
near term. Investments classified as neither trading securities nor
held-to-maturity shall be classified as available-for-sale securities. SFAS No.
115 also requires that unrealized holding gains and losses for trading
securities be included in earnings, while unrealized gains and losses for
available-for-sale securities be excluded from earnings and reported as a
separate component of shareholder equity until realized. SFAS No. 115 also
requires that for a decline in the fair value which is judged to be other than
temporary, the cost basis of the security should be written down to fair value,
and the amount of the write-down recognized in earnings as a realized loss.
Previously, the Company classified all of its fixed maturities and equity
securities as available-for-sale or held-to-maturity investments. Fixed
maturities held-to-maturity consist of certain bonds, presented at amortized
cost, that management intends and has the ability to hold until maturity. Fixed
maturities available-for-sale consist of certain bonds and redeemable preferred
stocks, presented at fair value, that management may not hold until maturity.
Equity securities available-for-sale are comprised of common stocks which are
carried at fair value. Prior to January 1, 1994, all fixed maturity investments,
which included bonds and redeemable preferred stocks, were principally carried
at amortized cost. Equity securities, which included common and non-redeemable
preferred stock, were carried at fair value. Unrealized gains or losses on
investments classified as available-for-sale, net of deferred federal income
taxes, minority interest, deferred policy acquisition expenses and amounts
attributable to participating contractholders, are included as a separate
component of shareholders' equity. As discussed in Note 3, the Company
transferred all securities classified as held-to-maturity to available-for-sale
on November 30, 1995.
Realized gains and losses on sales of fixed maturities and equity
securities are determined on the specific-identification basis using amortized
cost for fixed maturities and cost for equity securities. Fixed maturities and
equity securities with other than temporary declines in fair value are written
down to estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage
loans is valued at the estimated fair value at the time of foreclosure. The
Company considers several methods in determining fair value at foreclosure,
using primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
6
<PAGE>
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, and interest rate futures contracts. These instruments involve
credit risk and also may be subject to risk of loss due to interest rate
fluctuation. The Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other security to
minimize losses.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policy. Acquisition costs related to universal life products and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits over the expected life of the contracts using a revised
interest rate applied to the remaining benefit period. Acquisition costs related
to annuity and other life insurance businesses are deferred and amortized,
generally in proportion to the ratio of annual revenue to the estimated total
revenues over the contract periods based upon the same assumptions used in
estimating the liability for future policy benefits. Deferred acquisition costs
for each product are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholders' equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policy in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policy, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policy are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policy that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made on property and casualty and health insurance
for reported losses and estimates of losses incurred but not reported. These
liabilities are determined using case basis evaluations and statistical analyses
and represent estimates of the ultimate cost of all losses incurred but not
paid. These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. Estimated amounts of salvage
and subrogation on unpaid property and casualty losses are deducted from the
liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
7
<PAGE>
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policy in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policy
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. The
participating life insurance in force was 16.2% of the face value of total life
insurance in force at December 31, 1994. The premiums on participating life,
health and annuity policy were 11.3%, 6.4% and 6.6% of total life, health and
annuity statutory premiums prior to demutualization in 1995, 1994 and 1993,
respectively. Total policyholders' dividends were $23.3 million, $32.8 million
and $24.2 million prior to demutualization in 1995, 1994 and 1993, respectively.
L. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
consolidated United States federal income tax return. Entities included within
the consolidated group are segregated into either a life insurance or non-life
insurance company subgroup. The consolidation of these subgroups is subject to
certain statutory restrictions on the percentage of eligible non-life tax losses
that can be applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax return.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences as defined by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). These differences result primarily from loss reserves, policy
acquisition expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" was issued. This statement requires
companies to write down to fair value long-lived assets whose carrying value is
greater than the undiscounted cash flows of those assets. The statement also
requires that long-lived assets of which management is committed to dispose,
either by sale or abandonment, be valued at the lower of their carrying amount
or fair value less costs to sell. This statement is effective for fiscal years
beginning after December 15, 1995. Management expects that adoption of this
statement will not have a material effect on the financial statements.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
8
<PAGE>
2. SIGNIFICANT TRANSACTIONS
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of $21.00 per share in
a public offering, resulting in net proceeds of $248.0 million, and issued
Senior Debentures in the principal amount of $200.0 million which resulted in
net proceeds of $197.2 million. AFC contributed $392.4 million of these proceeds
to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG,
a division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995.
In March and April, 1993, Citizens Corporation, a newly formed holding
company for Citizens, issued approximately 19.35% of its common stock in an
initial public offering, generating net proceeds of $156.2 million (7.0 million
shares at $24.00 per share). Proceeds to Citizens Corporation were reduced by
underwriting and other stock issuance costs. A non-taxable gain of $62.9 million
was recorded in 1993 in connection with this initial public offering. This gain
is non-taxable because only newly-issued shares of Citizens Corporation were
issued to the public.
Effective December 31, 1992, Hanover entered into a definitive agreement to
sell its wholly owned subsidiary, Beacon Insurance Company of America, and its
wholly owned subsidiary, American Select Insurance Company, for $89.7 million. A
gain of $20.7 million, net of taxes of $15.0 million, was recorded in 1993.
3. INVESTMENTS
A. FIXED MATURITIES AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, which requires that
investments be classified into one of three categories: held-to-maturity,
available-for-sale, or trading.
The effect of implementing SFAS No. 115 as of January 1, 1994 was an
increase in the carrying value of fixed maturity investments of $335.3 million,
a decrease in deferred policy acquisition costs of $20.8 million, an increase in
policyholder liabilities of $18.4 million, a net increase in deferred income tax
liabilities of $103.7 million, an increase in minority interest of $45.4
million, and an increase in shareholders' equity of $147.0 million, which
resulted from changing the carrying value of certain fixed maturities from
amortized cost to fair value and related adjustments. The implementation had no
effect on net income.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholders' equity of $12.8 million.
The amortized cost and fair value of available-for-sale and
held-to-maturity fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 377.0 $ 21.0 $ -- $ 398.0
States and political subdivisions 2,110.6 60.7 4.0 2,167.3
Foreign governments 60.6 3.4 0.6 63.4
Corporate fixed maturities 4,582.1 200.8 16.4 4,766.5
U.S. government mortgage-backed securities 337.6 8.6 2.1 344.1
Total fixed maturities available-for-sale $ 7,467.9 $ 294.5 $ 23.1 $ 7,739.3
---------------------------------------------------------
Equity securities $ 410.6 $ 111.7 $ 5.1 $ 517.2
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1994
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 280.2 $ 4.8 $ 9.1 $ 275.9
States and political subdivisions 2,011.3 14.9 76.2 1,950.0
Foreign governments 96.8 1.8 12.8 85.8
Corporate fixed maturities 4,201.4 24.7 157.4 4,068.7
U.S. government mortgage-backed securities 134.9 0.4 3.7 131.6
----------------------------------------------------------
Total fixed maturities available-for-sale $ 6,724.6 $ 46.6 $ 259.2 $ 6,512.0
----------------------------------------------------------
----------------------------------------------------------
Equity securities $ 260.4 $ 35.3 $ 9.3 $ 286.4
----------------------------------------------------------
----------------------------------------------------------
HELD-TO-MATURITY
State and political subdivisions $ 8.1 $ 0.1 $ 0.8 7.4
Foreign governments 20.7 0.2 0.2 20.7
Corporate fixed maturities 927.3 13.7 22.5 918.5
Corporate mortgage-backed securities 3.2 0.1 -- 3.3
----------------------------------------------------------
Total fixed maturities held-to-maturity $ 959.3 $ 14.1 $ 23.5 $ 949.9
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1995, the amortized cost and market value of assets
on deposit were $295.0 million and $303.6 million, respectively. At December 31,
1994, the amortized cost and market value of assets on deposit were $327.9
million and $323.5 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$82.2 million and $67.0 million were on deposit with various state and
governmental authorities at December 31, 1995 and 1994, respectively.
There were approximately $21.8 million of contractual fixed maturity
investment commitments at December 31, 1994 and none at December 31, 1995.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties, or the Company may have the right to put
or sell the obligations back to the issuers. Mortgage backed securities are
included in the category representing their ultimate maturity.
10
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Available-for-Sale
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 970.8 $ 975.6
Due after one year through five years 3,507.9 3,657.1
Due after five years through ten years 1,794.0 1,866.0
Due after ten years 1,195.2 1,240.6
-----------------------------
Total $ 7,467.9 $ 7,739.3
-----------------------------
-----------------------------
</TABLE>
The proceeds from sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Proceeds from Sales
of Available-for-Sale Gross Gross
1995 Securities Gains Losses
<S> <C> <C> <C>
Fixed maturities $ 1,612.3 $ 23.7 $ 33.0
---------------------------------------
Equity securities $ 122.2 $ 23.1 $ 6.9
---------------------------------------
1994
Fixed maturities $ 1,026.2 $ 12.6 $ 21.6
---------------------------------------
Equity securities $ 124.3 $ 17.4 $ 4.5
---------------------------------------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
Equity
Fixed Securities
Maturities and Other (1) Total
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Net appreciation (depreciation),
beginning of year $ (89.4) $ 10.4 $ (79.0)
---------------------------------------
Effect of transfer of securities
between classifications:
Net appreciation on available-
for-sale fixed maturities 29.2 -- 29.2
Effect of transfer on deferred
policy acquisition costs and
on policy liabilities (6.8) -- (6.8)
Provision for deferred federal
income taxes and minority
interest (9.6) -- (9.6)
---------------------------------------
12.8 -- 12.8
---------------------------------------
Net appreciation on available-
for-sale securities 465.4 87.5 552.9
Net depreciation from the effect
on deferred policy acquisition
costs and on policy liabilities (86.9) (86.9)
Provision for deferred federal
income taxes and minority interest (193.2) (53.6) (246.8)
---------------------------------------
185.3 33.9 219.2
---------------------------------------
Net appreciation, end of year $ 108.7 $ 44.3 $ 153.0
---------------------------------------
---------------------------------------
1994
Net appreciation, beginning of year $ -- $ 17.5 $ 17.5
---------------------------------------
Cumulative effect of accounting
change:
Net appreciation on available-
for-sale fixed maturities 335.3 -- 335.3
Net depreciation from the effect
of accounting change on
deferred policy acquisition
costs and on policy liabilities (39.2) -- (39.2)
Provision for deferred federal
income taxes and minority
interest (149.1) -- (149.1)
---------------------------------------
147.0 17.5 164.5
---------------------------------------
Net depreciation on available-
for-sale securities (547.9) (17.4) (565.3)
Net appreciation from the effect
on deferred policy acquisition
costs and on policy liabilities 73.2 -- 73.2
Benefit for deferred federal income
taxes and minority interest 238.3 10.3 248.6
---------------------------------------
Net appreciation (depreciation),
end of year $ (89.4) $ 10.4 $ (79.0)
---------------------------------------
---------------------------------------
</TABLE>
(1) Includes net appreciation on other investments of $6.9 million and $0.6
million in 1995 and 1994, respectively.
11
<PAGE>
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 799.5 $ 1,106.7
-----------------------
Real estate:
Held for sale 168.9 134.5
Held for production of income 10.7 45.8
-----------------------
Total real estate 179.6 180.3
-----------------------
Total mortgage loans and real estate $ 979.1 $ 1,287.0
-----------------------
-----------------------
</TABLE>
Reserves for mortgage loans were $33.8 million and $47.2 million as of
December 31, 1995 and 1994, respectively.
During 1995, 1994 and 1993, non-cash investing activities included real
estate acquired through foreclosure of mortgage loans, which had a fair value of
$26.1 million, $39.2 million and $26.7 million, respectively.
At December 31, 1995, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $8.2 million in
the Closed Block. These commitments generally expire within one year. There
are no contractual commitments to extend credit under commercial mortgage
loan agreements outside the Closed Block.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Office building $ 435.9 $ 553.6
Residential 145.3 207.3
Retail 205.6 246.5
Industrial / warehouse 93.8 144.1
Other 151.9 205.6
Valuation allowances (53.4) (70.1)
-----------------------
Total $ 979.1 $ 1,287.0
-----------------------
-----------------------
Geographic region:
South Atlantic $ 281.4 $ 374.2
Pacific 191.9 238.7
East North Central 118.2 138.5
Middle Atlantic 148.9 151.2
West South Central 79.7 102.3
New England 94.9 103.1
Other 117.5 249.1
Valuation allowances (53.4) (70.1)
-----------------------
Total $ 979.1 $ 1,287.0
-----------------------
-----------------------
</TABLE>
At December 31, 1995, scheduled mortgage loan maturities were as follows:
1996 - $206.1 million; 1997 - $143.7 million; 1998 - $167.4 million; 1999 -
$109.9 million; 2000 - $124.2 million; and $48.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1995, the Company refinanced $24.0 million of mortgage
loans based on terms which differed from those granted to new borrowers.
12
<PAGE>
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
1995 Balance at Balance at
January 1 Additions Deductions December 31
<S> <C> <C> <C> <C>
Mortgage loans $ 47.2 $ 1.5 $ 14.9 $ 33.8
Real estate 22.9 (0.6) 2.7 19.6
-----------------------------------------------------
Total $ 70.1 $ 0.9 $ 17.6 $ 53.4
-----------------------------------------------------
-----------------------------------------------------
1994
Mortgage loans $ 73.8 $ 14.6 $ 41.2 $ 47.2
Real estate 21.0 3.2 1.3 22.9
-----------------------------------------------------
Total $ 94.8 $ 17.8 $ 42.5 $ 70.1
-----------------------------------------------------
-----------------------------------------------------
1993
Mortgage loans $ 86.7 $ 4.6 $ 17.5 $ 73.8
Real estate 8.3 12.7 -- 21.0
-----------------------------------------------------
Total $ 95.0 $ 17.3 $ 17.5 $ 94.8
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
D. FUTURES CONTRACTS
FAFLIC purchases and sells futures contracts on margin to hedge against interest
rate fluctuations and their effect on the net cash flows from the sales of
guaranteed investment contracts. The notional amount of such futures contracts
outstanding were $74.7 million and $126.6 million at December 31, 1995 and 1994,
respectively. Because the Company purchases and sells futures contracts through
brokers who assume the risk of loss, the Company's exposure to credit risk under
futures contracts is limited to the margin deposited with the broker. The
maturity of all futures contracts outstanding are less than one year. The fair
value of futures contracts outstanding were $75.7 million and $126.5 million at
December 31, 1995 and 1994, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations
are deferred and recognized in income over the period being hedged corresponding
to related guaranteed investment contracts. Deferred hedging gains and (losses)
were $5.6 million, $(7.7) million, and $6.9 million in 1995, 1994 and 1993,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
management are realized immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contracts outstanding,
beginning of year $ 126.6 $ 141.7 $ 120.0
New contracts 343.5 816.0 493.3
Contracts terminated (395.4) (831.1) $ (471.6)
---------------------------------------
Contracts outstanding, end of year $ 74.7 $ 126.6 $ 141.7
---------------------------------------
---------------------------------------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed
13
<PAGE>
upon in the swap contract, and the foreign currency spot rate on the date of the
exchange. The fair values of the foreign currency swap contracts outstanding
were $104.2 million and $117.5 million at December 31, 1995 and 1994,
respectively.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1995, 1994, and 1993. The Company had no deferred
gains or losses on foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contracts outstanding, beginning
of year $ 118.7 $ 128.8 $ 95.0
New Contracts -- 5.0 50.8
Contracts expired -- (10.1) (17.0)
Contracts terminated (14.1) (5.0) --
---------------------------------------
Contracts outstanding, end
of year $ 104.6 $ 118.7 $ 128.8
---------------------------------------
---------------------------------------
</TABLE>
Expected maturities of foreign currency swap contracts are $36.0 million in
1996, $28.8 million in 1997, and $39.8 million in 1998 and thereafter.
F. OTHER
At December 31, 1995, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 554.0 $ 578.3 $ 601.5
Mortgage loans 97.0 119.9 155.7
Equity securities 16.8 12.1 7.1
Policy loans 20.3 23.3 23.5
Real estate 48.5 44.6 43.4
Other long-term investments 4.4 4.3 2.1
Short-term investments 21.4 9.5 7.4
---------------------------------------
Gross investment income 762.4 792.0 840.7
Less investment expenses (52.3) (48.9) (57.9)
---------------------------------------
Net investment income $ 710.1 $ 743.1 $ 782.8
---------------------------------------
---------------------------------------
</TABLE>
As of December 31, 1995, fixed maturities and mortgage loans on non-accrual
status were $1.4 million and $85.4 million, including restructured loans of
$46.8 million. The effect of non-accruals, compared with amounts that would have
been recognized in accordance with the original terms of the investments, was to
reduce net income by $0.6 million, $5.1 million and $14.0 million in 1995, 1994
and 1993, respectively.
The payment terms of mortgage loans may from time to time be restructured
or modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $98.9 million , $126.8 million and $167.0 million at
December 31, 1995, 1994 and 1993, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $11.1 million, $14.4 million and $18.1 million
in 1995, 1994 and 1993, respectively. Actual interest income on these loans
included in net investment income aggregated $7.1 million, $8.2 million and
$10.6 million in 1995, 1994 and 1993, respectively.
At December 31, 1995, fixed maturities with a carrying value of $1.4
million were non-income producing for the twelve months ended December 31, 1995.
There were no mortgage loans which were non-income producing for the twelve
months ended December 31, 1995.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ (7.0) $ 2.4 $ 48.8
Mortgage loans 1.4 (12.1) (0.5)
Equity securities 16.2 12.4 29.8
Real estate 5.3 1.4 (14.5)
Other 3.2 (3.0) (2.6)
--------------------------------------
Net realized investment gains $ 19.1 $ 1.1 $ 61.0
--------------------------------------
--------------------------------------
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were
$1,612.3 million, $1,036.5 million and $817.5 million in 1995, 1994 and 1993,
respectively. Realized gains on such sales were $23.7 million, $12.9 million and
$38.8 million; and realized losses were $33.0 million, $21.6 million and $2.6
million for 1995, 1994 and 1993, respectively.
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates
14
<PAGE>
which, in many cases, may differ significantly from the amounts which could be
realized upon immediate liquidation. In cases where market prices are not
available, estimates of fair value are based on discounted cash flow analyses
which utilize current interest rates for similar financial instruments which
have comparable terms and credit quality. Fair values of interest rate futures
were not material at December 31, 1995 and 1994.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 236.6 $ 236.6 $ 539.7 $ 539.7
Fixed maturities 7,739.3 7,739.3 7,471.3 7,461.9
Equity securities 517.2 517.2 286.4 286.4
Mortgage loans 799.5 845.4 1,106.7 1,105.8
Policy loans 123.2 123.2 364.9 364.9
------------------------------------------------------------
$ 9,415.8 $ 9,461.7 $ 9,769.0 $ 9,758.7
------------------------------------------------------------
------------------------------------------------------------
FINANCIAL LIABILITIES
Guaranteed investment contracts $ 1,632.8 $ 1,677.0 $ 2,170.6 $ 2,134.0
Supplemental contracts without life contingencies 24.4 24.4 25.3 25.3
Dividend accumulations 86.2 86.2 84.5 84.5
Other individual contract deposit funds 95.7 92.8 111.3 108.0
Other group contract deposit funds 894.0 902.8 980.3 969.6
Individual annuity contracts 966.3 810.0 988.9 870.6
Short-term debt 28.0 28.0 32.8 32.8
Long-term debt 2.8 2.9 2.7 2.7
------------------------------------------------------------
$ 3,730.2 $ 3,624.1 $ 4,396.4 $ 4,227.5
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
15
<PAGE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1995 is a
net pre-tax contribution from the Closed Block of $2.9 million. Summarized
financial information of the Closed Block as of September 30, 1995 (date used to
estimate financial information for the date of establishment of October 16,
1995) and December 31, 1995 and for the period October 1, 1995 through December
31, 1995 is as follows:
<TABLE>
<CAPTION>
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
December 31 September 30
<S> <C> <C>
Assets
Fixed maturities, at fair value
(amortized cost of $447.4 and
$313.3, respectively) $ 458.0 $ 318.4
Mortgage loans 57.1 61.6
Policy loans 242.4 245.3
Cash and cash equivalents 17.6 12.3
Accrued investment income 16.6 15.3
Deferred policy acquisition costs 24.5 24.8
Other assets 2.7 6.4
-----------------------
Total assets $ 818.9 $ 684.1
-----------------------
-----------------------
Liabilities
Policy liabilities and accruals $ 899.2 $ 894.3
Other liabilities 2.8 4.2
-----------------------
Total liabilities $ 902.0 $ 898.5
-----------------------
-----------------------
</TABLE>
<TABLE>
<CAPTION>
Period from October 1 through December 31
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<S> <C>
Revenues
Premiums $ 11.5
Net investment income 12.8
---------
Total revenues 24.3
---------
Benefits and expenses
Policy benefits 20.6
Policy acquisition expenses 0.8
---------
Total benefits and expenses 21.4
---------
Contribution from the Closed Block $ 2.9
---------
---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block $ 2.9
Initial cash transferred to the Closed Block 139.7
Change in deferred policy acquisition costs, net 0.4
Change in premiums and other receivables (0.1)
Change in policy liabilities and accruals 2.0
Change in accrued investment income (1.3)
Other, net 0.8
---------
Net cash provided by operating activities 144.4
---------
---------
Cash flows from investing activities:
Sales, maturities and repayments of investments 29.0
Purchases of investments (158.8)
Other, net 3.0
---------
Net cash used by investing activities (126.8)
---------
Change in cash and cash equivalents and ending balance $ 17.6
---------
---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans at December 31, 1995.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
16
<PAGE>
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term
Commercial paper $ 27.7 $ 32.8
Other 0.3 --
-----------------------
Total short-term debt $ 28.0 $ 32.8
-----------------------
-----------------------
Long-term debt $ 2.8 $ 2.7
-----------------------
-----------------------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments. Commercial paper borrowing
arrangements are supported by various lines of credit. As of December 31, 1995,
the weighted average interest rate for outstanding commercial paper was 5.8%.
As of December 31, 1995, FAFLIC had approximately $245.0 million in
committed lines of credit provided by U.S. banks, of which $217.3 million was
available for borrowing. These lines of credit generally have terms of less than
one year, and require the Company to pay annual commitment fees ranging from
0.10% to 0.125% of the available credit. Interest that would be charged for
usage of these lines of credit is based upon negotiated arrangements.
Interest expense was $4.1 million, $4.3 million and $1.6 million in 1995,
1994 and 1993, respectively.
In October, 1995, AFC issued $200.0 million face amount of Senior
Debentures for proceeds of $197.2 million net of discounts and issuance costs.
These securities have an effective interest rate of 7.65%, and mature on October
16, 2025. Interest is payable semiannually on October 15 and April 15 of each
year. The Senior Debentures are subject to certain restrictive covenants,
including limitations on issuance of or disposition of stock of restricted
subsidiaries and limitations on liens. AFC is in compliance with all covenants.
The primary source of cash for repayment of the debt by AFC is dividends from
FAFLIC.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current $ 119.7 $ 45.4 $ 95.1
Deferred (37.0) 8.0 (20.4)
---------------------------------------
Total $ 82.7 $ 53.4 $ 74.7
---------------------------------------
---------------------------------------
</TABLE>
The federal income taxes attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the expected federal income tax rate. The sources
of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal income tax
expense $ 105.6 $ 53.7 $ 138.2
Tax-exempt interest (32.2) (35.9) (32.8)
Differential earnings amount (7.6) 35.0 (10.9)
Non-taxable gain -- -- (22.0)
Dividend received deduction (4.0) (2.5) (1.3)
Foreign tax credit (0.7) (0.8) (0.9)
Changes in tax reserve estimates 19.3 4.0 3.5
Other, net 2.3 (0.1) 0.9
---------------------------------------
Federal income tax expense $ 82.7 $ 53.4 $ 74.7
---------------------------------------
---------------------------------------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual
company, reduced its deduction for policyholder dividends by the differential
earnings amount. This amount was computed, for each tax year, by multiplying the
average equity base of the FAFLIC/AFLIAC consolidated group, as determined for
tax purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). For its
1995 federal income tax return, FAFLIC has estimated that there will be no tax
effect from a differential earnings amount, including the expected effect of
future recomputations by the IRS. As a stock life company, FAFLIC is no longer
required to reduce its policyholder dividend deduction by the differential
earnings amount.
17
<PAGE>
The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards $ (9.8) $ (11.9)
Loss reserve discounting (178.3) (187.6)
Deferred acquisition costs 55.1 54.2
Employee benefit plans (25.5) (22.0)
Investments, net 77.4 (22.7)
Fixed assets 2.5 4.5
Bad debt reserve (1.8) (1.8)
Other, net (0.8) (1.8)
------------------------
Deferred tax asset, net $ (81.2) $ (189.1)
------------------------
------------------------
</TABLE>
The deferred income tax liability represents the tax effects of temporary
differences attributable to the FAFLIC/AFLIAC consolidated federal tax return
group. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets) liabilities
NOL carryforwards $ -- $ (3.3)
AMT carryforwards -- (1.5)
Loss reserve discounting (129.1) (118.2)
Deferred acquisition costs 169.7 199.0
Differential earnings amount -- 27.7
Employee benefit plans (14.6) (15.4)
Investments, net 67.0 (30.9)
Fixed assets (1.7) (0.9)
Bad debt reserve (26.3) (27.9)
Other, net (17.2) (14.8)
------------------------
Deferred tax liability, net $ 47.8 $ 13.8
------------------------
------------------------
</TABLE>
Gross deferred income tax assets totaled $405.1 million and $460.7 million
at December 31, 1995 and 1994, respectively. Gross deferred income tax
liabilities totaled $371.1 million and $285.4 million at December 31, 1995 and
1994, respectively.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1995, there are no available non-life
net operating loss carryforwards, and there are available alternative minimum
tax credit carryforwards of $9.8 million.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the FAFLIC/AFLIAC consolidated
group's federal income tax returns through 1988. The IRS has also examined the
Allmerica P&C consolidated group's federal income tax returns through 1988.
Deficiencies asserted with respect to tax years 1977 through 1981 have been paid
and recorded, and the Company has filed a recomputation of such years with
appeals claiming a refund with respect to certain agreed upon issues. The
Company is currently considering its response to certain adjustments proposed by
the IRS with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and
1983, and to possible adjustments under consideration by the IRS with respect to
Allmerica P&C's federal income tax returns for 1989, 1990, and 1991. If upheld,
these adjustments would result in additional payments; however, the Company will
vigorously defend its position with respect to these adjustments. In
management's opinion, adequate tax liabilities have been established for all
years. However, the amount of these tax liabilities could be revised in the near
term if estimates of the Company's ultimate liability are revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Through December 31, 1994,
retirement benefits were based primarily on employees' years of service and
compensation during the highest five consecutive plan years of employment.
Benefits under this defined benefit formula were frozen for most employees (but
not for eligible agents) effective December 31, 1994. In their place, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee as a percentage of
that employee's salary, similar to a defined contribution plan arrangement. The
1995 allocation was based on 7.0% of each eligible employee's salary.
Continuation of the defined benefit cash balance formula is subject to the
resolution of certain technical issues, and may be subject to receipt of a
favorable determination letter from the IRS that the Company's pension plans, as
amended to reflect the cash balance formula, will continue to satisfy the
requirements of Section 401(a) of the Internal Revenue Code. The Company's
policy for the plans is to fund at least the minimum amount required by the
Employee Retirement Income Security Act of 1974.
18
<PAGE>
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 19.7 $ 13.0 $ 9.8
Interest accrued on projected
benefit obligations 21.1 20.0 16.9
Actual return on assets (89.3) (2.6) (15.1)
Net amortization and deferral 66.1 (16.3) (5.8)
--------------------------------------
Net pension expense $ 17.6 $ 14.1 $ 5.8
--------------------------------------
--------------------------------------
</TABLE>
The following table summarizes the combined status of the three pension
plans. At December 31, 1995 and 1994, each plan's projected benefit obligation
exceeded its assets.
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 325.6 $ 221.7
Unvested benefit obligation 5.0 3.5
-----------------------
Accumulated benefit obligation $ 330.6 $ 225.2
-----------------------
-----------------------
Pension liability included in
Consolidated Balance Sheets:
Projected benefit obligation $ 367.1 $ 254.6
Plan assets at fair value 321.2 239.7
-----------------------
Plan assets less than projected
benefit obligation (45.9) (14.9)
Unrecognized net loss from
past experience 48.8 42.3
Unrecognized prior service benefit (13.8) (17.3)
Unamortized transition asset (26.5) (28.3)
-----------------------
Net pension liability $ (37.4) $ (18.2)
-----------------------
-----------------------
</TABLE>
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1995 and 8.5% in 1994, and the assumed
long-term rate of return on plan assets was 9%. The actuarial present value of
the projected benefit obligations was determined using assumed rates of increase
in future compensation levels ranging from 5.5% to 6.5%. The effect of changes
in actuarial assumptions, including the decrease in the weighted average
discount rate, was an increase in the Company's projected benefit obligation of
$76.7 million at December 31, 1995. Plan assets are invested primarily in
various separate accounts and the general account of FAFLIC. The plans also hold
stock of AFC.
The Company has a profit sharing and 401(k) plan for its employees.
Effective for plan years beginning after 1994, the profit sharing formula for
employees has been discontinued and a 401(k) match feature has been added to the
continuing 401(k) plan for the employees. Total plan expense in 1995, 1994 and
1993 was $5.2 million, $12.6 million and $22.6 million, respectively. In
addition to this Plan, the Company has a defined contribution plan for
substantially all of its agents. The Plan expense in 1995, 1994 and 1993 was
$3.5 million, $2.7 million and $2.4 million, respectively.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
SFAS No. 106 requires employers to recognize the costs and obligations of
postretirement benefits other than pensions over the period ending with the date
an employee is fully eligible to receive benefits. Previously, such costs were
generally recognized as expenses when paid. The adoption increased accrued
liabilities by $69.1 million. The effect on the consolidated income statement
was $35.4 million, net of tax of $23.5 million and minority interest of $10.2
million, reported as a cumulative effect of a change in accounting principle.
The ongoing effect of adopting the new standard increased 1993 net periodic
postretirement benefit expense by $6.6 million, and decreased net income by $4.3
million.
19
<PAGE>
The plans' funded status reconciled with amounts recognized in the
Company's consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 44.9 $ 35.2
Fully eligible active plan participants 14.0 15.2
Other active plan participants 45.9 38.5
-----------------------
104.8 88.9
Plan assets at fair value -- --
-----------------------
Accumulated postretirement benefit
obligation in excess of plan assets 104.8 88.9
Unrecognized loss 13.4 4.7
-----------------------
Accrued postretirement benefit costs $ 91.4 $ 84.2
-----------------------
-----------------------
</TABLE>
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <S> <C> <C>
Service cost $ 4.2 $ 6.6 $ 3.8
Interest cost 6.9 6.9 5.7
Amortization of (gain) loss (0.5) 1.4 --
-------------------------------------
Net periodic postretirement
benefit expense $ 10.6 $ 14.9 $ 9.5
-------------------------------------
-------------------------------------
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1995, health care costs were assumed to increase 10% in 1996,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1995
by $10.1 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1995 by $1.2 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at January 1, 1993 was 8.5%. The rate was 7.0%
and 8.5% at December 31, 1995 and 1994, respectively. The effect of changes in
actuarial assumptions, including the decrease in the weighted average discount
rate, was an increase in the Company's accumulated postretirement benefit
obligation of $15.1 million at December 31, 1995.
11. POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, (SFAS No. 112), "Employers' Accounting
for Postemployment Benefits", which requires employers to recognize the costs
and obligations of severance, disability and related life insurance and health
care benefits to be paid to inactive or former employees after employment but
before retirement. Prior to adoption, the Company had recognized the cost of
these benefits on an accrual or paid basis, depending on the plan.
Implementation of SFAS No. 112 resulted in a transition obligation of $1.9
million, net of federal income taxes and minority interest, and is reported as a
cumulative effect of a change in accounting principle in the consolidated
statement of income. The impact of this accounting change, after recognition of
the cumulative effect, was not significant.
12. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any
twelve month period, without the prior permission of the Commonwealth of
Massachusetts Insurance Commissioner, to the greater of (i) 10% of its statutory
policyholder surplus as of the preceding December 31 or (ii) the individual
company's statutory net gain from operations for the preceding calendar year (if
such insurer is a life company), or its net income for the preceding calendar
year (if such insurer is not a life company). In addition, under Massachusetts
law, no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. At January 1, 1996, FAFLIC could pay
dividends of $144.9 million to AFC without prior approval of the Commissioner.
Dividends from FAFLIC to AFC will be the primary source of cash for
repayment of the debt by AFC and payment of dividends to AFC stockholders.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of
20
<PAGE>
Insurance, is limited to the greater of (i) 10% of its policyholders' surplus as
of the preceding December 31 or (ii) the individual company's statutory net gain
from operations for the preceding calendar year (if such insurer is a life
company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance. At January 1,
1996, AFLIAC could pay dividends of $4.3 million to FAFLIC without prior
approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
At January 1, 1996, the maximum dividend and other distributions that could be
paid to Allmerica P&C by Hanover, without prior approval of the Insurance
Commissioner, was approximately $72.8 million.
Pursuant to Michigan's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Michigan Insurance Commissioner, is limited to the greater of
10% of policyholders' surplus as of December 31 of the immediately preceding
year or the statutory net income less realized gains, for the immediately
preceding calendar year. At January 1, 1996, Citizens Insurance could pay
dividends of $45.6 million to Citizens Corporation without prior approval.
13. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and
Casualty and Corporate Risk Management Services. The Regional Property and
Casualty segment includes property and casualty insurance products, such as
automobile insurance, homeowners insurance, commercial multiple-peril insurance,
and workers' compensation insurance. These products are offered by Allmerica P&C
through its operating subsidiaries, Hanover and Citizens. Substantially all of
the Regional Property and Casualty segment's earnings are generated in Michigan
and the Northeast (Connecticut, Massachusetts, New York, New Jersey, New
Hampshire, Rhode Island, Vermont and Maine). The Corporate Risk Management
Services segment, formerly known as the Employee Benefit Services segment,
includes group life and health insurance products and services which assist
employers in administering employee benefit programs and in managing the related
risks.
The Retirement and Asset Management group includes three segments: Retail
Financial Services, Institutional Services and Allmerica Asset Management. The
Retail Financial Services segment, formerly known as the Individual Financial
Services segment, includes variable annuities, variable universal life-type,
traditional and health insurance products distributed via retail channels to
individuals across the country. The Institutional Services segment includes
primarily group retirement products such as 401(k) plans, tax-sheltered
annuities and GIC contracts which are distributed to institutions across the
country via work-site marketing and other arrangements. Allmerica Asset
Management, formerly included in the results of the Institutional Services
segment, is a Registered Investment Advisor which provides investment advisory
services to other institutions, such as insurance companies and pension plans.
21
<PAGE>
Summarized below is financial information with respect to business segments
for the year ended and as of December 31.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty $ 2,095.1 $ 2,004.8 $ 2,051.1
Corporate Risk Management 328.5 302.4 296.0
-----------------------------------------
Subtotal 2,423.6 2,307.2 2,347.1
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 486.7 507.9 524.0
Institutional Services 344.1 397.9 382.0
Allmerica Asset Management 4.4 4.0 -
-----------------------------------------
Subtotal 835.2 909.8 906.0
Eliminations (20.3) (21.9) (13.9)
-----------------------------------------
Total $ 3,238.5 $ 3,195.1 $ 3,239.2
-----------------------------------------
-----------------------------------------
Income (loss) from continuing
operations before income taxes:
Risk Management
Regional Property and Casualty $ 206.3 $ 113.1 $ 331.3
Corporate Risk Management 18.3 19.9 18.1
-----------------------------------------
Subtotal 224.6 133.0 349.4
-----------------------------------------
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 35.2 14.2 61.6
Institutional Services 42.8 4.4 (16.1)
Allmerica Asset Management 2.3 1.9 --
-----------------------------------------
Subtotal 80.3 20.5 45.5
-----------------------------------------
Total $ 304.9 $ 153.5 $ 394.9
-----------------------------------------
-----------------------------------------
Identifiable assets:
Risk Management
Regional Property and Casualty $ 5,741.8 $ 5,408.7 $ 5,198.1
Corporate Risk Management 458.9 386.3 367.6
-----------------------------------------
Subtotal 6,200.7 5,795.0 5,565.7
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 7,218.7 5,639.8 5,104.5
Institutional Services 4,280.9 4,484.5 4,708.2
Allmerica Asset Management 2.1 2.2 --
-----------------------------------------
Subtotal 11,501.7 10,126.5 9,812.7
-----------------------------------------
Total $ 17,702.4 $ 15,921.5 $ 15,378.4
-----------------------------------------
-----------------------------------------
</TABLE>
14. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $36.4 million, $35.2 million and $31.9 million in 1995, 1994 and
1993, respectively. At December 31, 1995, future minimum rental payments under
non-cancelable operating leases were approximately $84.6 million, payable as
follows: 1996 - $29.4 million; 1997 - $21.5 million; 1998 - $14.6 million; 1999
- - $8.7 million; 2000 - $5.5 million; and $4.9 million thereafter.
15. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual
22
<PAGE>
Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association ("MCCA").
As of December 31, 1995, the MCCA and CAR were the only two reinsurers which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1995, 1994 and 1993 were
$49.1 million and $37.9 million, $50.0 million and $34.6 million, and $45.0
million and $31.7 million, respectively.
From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company is currently
involved in legal proceedings regarding the MWCRP's deficit which through a
legislated settlement issued on June 23, 1995 provided for an initial funding of
$220.0 million, of which the insurance carriers were responsible for $65.0
million. Hanover paid its allocation of $4.2 million in December 1995. Some of
the small carriers are currently appealing this decision. The Company's right to
recover reinsurance balances for claims properly paid is not at issue in any
such proceedings. The Company expects to collect its reinsurance balance;
however, funding of the cash flow needs of the MWCRP may in the future be
affected by issues related to certain litigation, the outcome of which the
Company cannot predict. The Company ceded to MCCA net premiums earned and losses
and loss adjustment expenses in 1995, 1994 and 1993 of $66.8 million and $62.9
million, $80.0 million and $24.2 million, and $76.4 million and $126.8 million,
respectively. Because the MCCA is supported by assessments permitted by statute,
and all amounts billed by the Company to CAR, MWCRP and MCCA have been paid when
due, the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance premiums:
Direct $ 438.9 $ 447.2 $ 453.0
Assumed 71.0 54.3 31.3
Ceded (150.3) (111.0) (83.2)
----------------------------------------
Net premiums $ 359.6 $ 390.5 $ 401.1
----------------------------------------
----------------------------------------
Property and casualty
premiums written:
Direct $ 2,039.4 $ 1,992.4 $ 1,906.2
Assumed 125.0 128.6 106.3
Ceded (279.1) (298.1) (267.4)
----------------------------------------
Net premiums $ 1,885.3 $ 1,822.9 $ 1,745.1
----------------------------------------
----------------------------------------
Property and casualty
premiums earned:
Direct $ 2,021.7 $ 1,967.1 $ 1,870.1
Assumed 137.7 116.1 114.8
Ceded (296.2) (291.9) (306.7)
----------------------------------------
Net premiums $ 1,863.2 $ 1,791.3 $ 1,678.2
----------------------------------------
----------------------------------------
Life insurance and other individual
policy benefits, claims, losses and
loss adjustment expenses:
Direct $ 749.6 $ 773.0 $ 819.4
Assumed 38.5 28.9 6.8
Ceded (69.5) (61.6) (38.4)
----------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 718.6 $ 740.3 $ 787.8
----------------------------------------
----------------------------------------
Property and casualty benefits,
claims, losses and loss
adjustment expenses:
Direct $ 1,372.7 $ 1,364.4 $ 1,310.3
Assumed 146.1 102.7 98.8
Ceded (229.1) (160.4) (209.7)
----------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 1,289.7 $ 1,306.7 $ 1,199.4
----------------------------------------
----------------------------------------
</TABLE>
23
<PAGE>
16. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the amount of policy acquisition expenses deferred and
amortized:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 802.8 $ 746.9 $ 700.4
Acquisition expenses deferred 504.8 510.3 482.3
Amortized to expense
during the year (470.3) (475.7) (435.8)
Adjustment to equity
during the year (50.4) 21.3 --
Transferred to the Closed Block (24.8) -- --
Adjustment for cession of
term life insurance (26.4) -- --
---------------------------------------
Balance at end of year $ 735.7 $ 802.8 $ 746.9
---------------------------------------
---------------------------------------
</TABLE>
17. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates at liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for outstanding claims, losses and loss adjustment expenses
related to the Company's accident and health business was $375.9 million, $305.0
million and $276.3 million at December 31, 1995, 1994 and 1993, respectively.
Accident and health claim liabilities have been re-estimated for all prior years
and were increased by $26.4 million, $6.5 million and $12.7 million in 1995,
1994 and 1993, respectively. Unfavorable development in the accident and health
business during 1995 is primarily due to reserve strengthening and adverse
experience in the Company's individual disability line of business.
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses and LAE,
beginning of year $ 2,821.7 $ 2,717.3 $ 2,598.9
Incurred losses and LAE, net
of reinsurance recoverable:
Provision for insured events of
the current year 1,427.3 1,434.8 1,268.2
Decrease in provision for insured
events of prior years (137.6) (128.1) (68.8)
----------------------------------------
Total incurred losses and LAE 1,289.7 1,306.7 1,199.4
----------------------------------------
Payments, net of reinsurance
recoverable:
Losses and LAE attributable to
insured events of current year 652.2 650.2 523.5
Losses and LAE attributable to
insured events of prior years 614.3 566.9 564.3
----------------------------------------
Total payments 1,266.5 1,217.1 1,087.8
----------------------------------------
Less reserves assumed by purchaser
of Beacon -- -- (28.8)
----------------------------------------
Change in reinsurance recoverable
on unpaid losses 51.1 14.8 35.6
----------------------------------------
Reserve for losses and LAE,
end of year $ 2,896.0 $ 2,821.7 $ 2,717.3
----------------------------------------
----------------------------------------
</TABLE>
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $137.6 million,
$128.1 million and $68.8 million in 1995, 1994 and 1993, respectively. The
increase in favorable development on prior years' reserves of $9.5 million in
1995 results primarily from a $34.6 million increase in favorable development at
Citizens. Favorable development in Citizens' personal automobile and workers'
compensation lines increased $16.6 million and $15.5 million, to favorable
development of $4.4 million and $32.7 million, respectively. Hanover's favorable
development, not including the effect of voluntary and involuntary pools, was
relatively unchanged at $90.2 million in 1995 compared to $91.7 million in 1994.
Favorable development in Hanover's workers' compensation line increased $27.7
million to $31.0 million during 1995. This was offset by decreases of $14.6
million and
24
<PAGE>
$12.6 million, to $45.5 million and $0.1 million, in the personal automobile
and commercial multiple peril lines, respectively. Favorable development in
Hanover's voluntary and involuntary pools decreased $23.6 million to $0.4
million during 1995.
The increase in favorable development on prior years' reserves of $59.3
million in 1994 primarily results from an increase in favorable development in
the voluntary and involuntary pools of $47.0 million in 1994. The remainder of
the favorable reserve development in 1994 is the result of favorable severity
trends, primarily in the personal automobile and commercial multiple peril
lines.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small.
Losses and LAE reserves related to environmental damage and toxic tort
liability, included in the total reserve for losses and LAE, were $28.6 million
and $19.4 million, net of reinsurance of $8.4 million and $8.1 million, at the
end of 1995 and 1994, respectively. During 1995, the Regional Property and
Casualty subsidiaries redefined their environmental liabilities in conformity
with new guidelines issued by the NAIC. The 1994 liability has been conformed to
the 1995 presentation. This had no impact on results of operations. Management
believes that, notwithstanding the evolution of case law expanding such
liability, recorded reserves for environmental liability are adequate, and is
not aware of any litigation or pending claims that may result in additional
material liabilities in excess of recorded reserves. During 1995, Hanover
performed an actuarial review of its environmental reserves. This resulted in
Hanover's providing additional reserves for "IBNR" (incurred but not reported)
claims, in addition to existing reserves for reported claims. At Citizens,
environmental reserves are primarily related to reported claims. Although these
claims are not material, their existence gives rise to uncertainty and is
discussed because of the possibility, however remote, that they may become
material. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
18. MINORITY INTEREST
The Company's interest in Allmerica P&C, is represented by ownership of 58.3%,
57.4% and 57.4% of the outstanding shares of common stock at December 31, 1995,
1994 and 1993, respectively. Earnings and shareholders' equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
19. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions have contributed to an increase in the number of
insurance companies that are under regulatory supervision. This is expected to
result in an increase in mandatory assessments by state guaranty funds, or
voluntary payments by, solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. The Company is not able to
reasonably estimate the potential effect on it of any such future assessments or
voluntary payments.
LITIGATION
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers are liable for $65.0 million payable
on or before January 1, 1996, and employers will contribute $110.0 million
payable through surcharges on premiums over the course of the next ten years.
The major insurers are responsible for 90% of the $65.0 million. Hanover's
allocated share of the settlement is approximately $4.2 million, which was paid
in December 1995. The remainder of the deficit of $45.0 million will be paid by
the Maine Guaranty Fund Surplus payable in quarterly contributions over ten
years. The smaller carriers have recently filed litigation to appeal the
settlement. The Company believes that adequate reserves have been established
for any additional liability.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
25
<PAGE>
20. STATUTORY FINANCIAL INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Statutory surplus differs from
shareholders' equity reported in accordance with generally accepted accounting
principles for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, postretirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income (Unconsolidated)
Property and Casualty Companies $ 139.8 $ 74.5 $ 166.8
Life and Health Companies 134.3 40.7 114.8
----------------------------------------
Statutory Shareholders'
Surplus (Unconsolidated)
Property and Casualty Companies $ 1,151.7 $ 989.8 $ 960.1
Life and Health Companies 965.6 465.3 526.4
----------------------------------------
</TABLE>
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
For the Three Months Ended
(In millions)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 March 31 June 30 Sept. 30 Dec. 31
Total revenues $ 841.4 $ 793.4 $ 819.2 $ 784.5
------------------------------------------------------
Income before extraordinary item $ 39.2 $ 29.9 $ 34.8 $ 45.2
Extraordinary item - demutualization expenses (2.5) (3.5) (4.7) (1.4)
------------------------------------------------------
Net income $ 36.7 $ 26.4 $ 30.1 $ 43.8
------------------------------------------------------
------------------------------------------------------
1994
Total revenues $ 815.4 $ 786.8 $ 799.3 $ 793.6
------------------------------------------------------
Income (loss) before extraordinary item $ (10.9) $ 15.7 $ 26.6 $ 17.7
Extraordinary item - demutualization expenses (1.6) (2.5) (2.8) (2.3)
Cumulative effect of changes in accounting principles (1.9) -- -- --
------------------------------------------------------
Net income $ (14.4) $ 13.2 $ 23.8 $ 15.4
------------------------------------------------------
------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
STATEMENTS OF ASSETS AND LIABILITIES - DECEMBER 31, 1995
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . $3,315,228 $1,929,756 $4,385,441 $1,316,899
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . -- -- 78,532 --
----------- ----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 3,315,228 1,929,756 4,463,973 1,316,899
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . 4,954 35 -- 917
----------- ----------- ----------- -----------
Net assets . . . . . . . . . . . . . . . . . . . . . . . . $3,310,274 $1,929,721 $4,463,973 $1,315,982
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . . $2,325,899 $1,298,936 $3,549,467 $ 999,145
Non-qualified variable annuity policies . . . . . . . . . 974,375 630,785 904,506 315,078
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . -- -- -- --
Value of annuitant mortality fluctuation reserve. . . . . 10,000 -- 10,000 1,759
----------- ----------- ----------- -----------
$3,310,274 $1,929,721 $4,463,973 $1,315,982
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . 1,711,686 1,128,920 3,334,690 718,932
Net asset value per qualified unit, December 31, 1995. . . $ 1.358835 $ 1.150601 $ 1.064407 $ 1.389763
Non-qualified units outstanding, December 31, 1995 . . . . 724,426 548,222 859,169 227,979
Net asset value per non-qualified unit, December 31, 1995. $ 1.358835 $ 1.150601 $ 1.064407 $ 1.389763
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SELECT
GOVERNMENT BOND AGGRESSIVE GROWTH SELECT GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
5 6 7
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . $1,225,783 $3,876,384 $1,661,073
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . -- 3,911 --
----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 1,225,783 3,880,295 1,661,073
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . 3,093 -- 1,858
----------- ----------- -----------
Net assets . . . . . . . . . . . . . . . . . . . . . . . . $1,222,690 $3,880,295 $1,659,215
----------- ----------- -----------
----------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . . $ 819,304 $2,893,286 $1,207,512
Non-qualified variable annuity policies . . . . . . . . . 403,386 987,009 451,703
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . -- -- --
Value of annuitant mortality fluctuation reserve. . . . . -- -- --
----------- ----------- -----------
$1,222,690 $3,880,295 $1,659,215
----------- ----------- -----------
----------- ----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . 735,886 2,167,304 929,819
Net asset value per qualified unit, December 31, 1995. . . $ 1.113358 $ 1.334970 $ 1.298652
Non-qualified units outstanding, December 31, 1995 . . . . 362,314 739,350 347,825
Net asset value per non-qualified unit, December 31, 1995. $ 1.113358 $ 1.334970 $ 1.298652
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SELECT SMALL
GROWTH AND INCOME CAP VALUE
SUB-ACCOUNT SUB-ACCOUNT
8 9
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . $2,875,045 $1,814,249
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . 1,645 11,196
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 2,876,690 1,825,445
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . -- --
----------- -----------
Net assets . . . . . . . . . . . . . . . . . . . . . . . . $2,876,690 $1,825,445
----------- -----------
Net asset distribution by category: ----------- -----------
Qualified variable annuity policies . . . . . . . . . . . $2,072,191 $1,248,847
Non-qualified variable annuity policies . . . . . . . . . 798,962 576,598
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . -- --
Value of annuitant mortality fluctuation reserve. . . . . 5,537 --
----------- -----------
$2,876,690 $1,825,445
----------- -----------
----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . 1,565,619 1,103,993
Net asset value per qualified unit, December 31, 1995. . . $ 1.323560 $ 1.131209
Non-qualified units outstanding, December 31, 1995 . . . . 607,829 509,719
Net asset value per non-qualified unit, December 31, 1995. $ 1.323560 $ 1.131209
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
STATEMENTS OF ASSETS AND LIABILITIES - DECEMBER 31, 1995
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
- -----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SELECT SELECT CAPITAL DGPF VIPF
NTERNATIONAL EQUITY APPRECIATION INTERNATIONAL EQUITY HIGH INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 20 102
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . $2,354,622 $1,457,479 -- --
Investment in shares of Fidelity Variable
Insurance Products Fund . . . . . . . . . . . . . . . . . -- -- -- $2,998,760
Investment in shares of Delaware Group Premium Fund, Inc.. -- -- $1,455,134 --
Investment in shares of T. Rowe Price International
Series, Inc.. . . . . . . . . . . . . . . . . . . . . . . -- -- -- --
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . 5,729 20,469 -- --
----------- ----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . 2,360,351 1,477,948 1,455,134 2,998,760
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . -- -- 1,039 3,310
----------- ----------- ----------- -----------
Net assets . . . . . . . . . . . . . . . . . . . . . . . $2,360,351 $1,477,948 $1,454,095 $2,995,450
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . $1,688,358 $1,009,865 $1,042,141 $2,048,412
Non-qualified variable annuity policies . . . . . . . . 671,880 467,806 411,954 947,038
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . 113 277 -- --
Value of annuitant mortality fluctuation reserve. . . . -- -- -- --
----------- ----------- ----------- -----------
$2,360,351 $1,477,948 $1,454,095 $2,995,450
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . 1,497,386 730,459 934,393 1,730,331
Net asset value per qualified unit, December 31, 1995. . . $ 1.127537 $ 1.382508 $ 1.115313 $ 1.183827
Non-qualified units outstanding, December 31, 1995 . . . . 595,983 338,575 369,361 799,980
Net asset value per non-qualified unit, December 31, 1995. $ 1.127537 $ 1.382508 $ 1.115313 $ 1.183827
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
VIPF VIPF VIPF
EQUITY INCOME GROWTH OVERSEAS
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
103 104 105
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . -- -- --
Investment in shares of Fidelity Variable
Insurance Products Fund . . . . . . . . . . . . . . . . . $8,197,784 $7,097,747 $2,971,817
Investment in shares of Delaware Group Premium Fund, Inc.. -- -- --
Investment in shares of T. Rowe Price International
Series, Inc.. . . . . . . . . . . . . . . . . . . . . . . -- -- --
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . 5,538 -- --
----------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . 8,203,322 7,097,747 2,971,817
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . -- 1,691 6,316
----------- ----------- -----------
Net assets . . . . . . . . . . . . . . . . . . . . . . . $8,203,322 $7,096,056 $2,965,501
----------- ----------- -----------
----------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . $5,692,296 $5,020,853 $2,055,214
Non-qualified variable annuity policies . . . . . . . . 2,511,026 2,075,203 910,287
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . -- -- --
Value of annuitant mortality fluctuation reserve. . . . -- -- --
----------- ----------- -----------
$8,203,322 $7,096,056 $2,965,501
----------- ----------- -----------
----------- ----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . 3,981,457 3,503,699 1,943,136
Net asset value per qualified unit, December 31, 1995. . . $ 1.429702 $ 1.433015 $ 1.057679
Non-qualified units outstanding, December 31, 1995 . . . . 1,756,328 1,448,138 860,645
Net asset value per non-qualified unit, December 31, 1995. $ 1.429702 $ 1.433015 $ 1.057679
<CAPTION>
- -----------------------------------------------------------------------------------------------
VIPF II T. ROWE
ASSET MANAGER INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT
106 150
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . -- --
Investment in shares of Fidelity Variable
Insurance Products Fund . . . . . . . . . . . . . . . . . $2,301,629 --
Investment in shares of Delaware Group Premium Fund, Inc.. -- --
Investment in shares of T. Rowe Price International Series -- $ 563,887
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . 327 12,722
----------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . 2,301,956 576,609
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . -- --
----------- ----------
Net assets . . . . . . . . . . . . . . . . . . . . . . . $2,301,956 576,609
----------- ----------
----------- ----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . $1,728,329 355,111
Non-qualified variable annuity policies . . . . . . . . 573,513 221,285
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . 114 213
Value of annuitant mortality fluctuation reserve. . . . -- --
----------- ----------
$2,301,956 576,609
----------- ----------
----------- ----------
Qualified units outstanding, December 31, 1995 . . . . . . 1,520,480 333,670
Net asset value per qualified unit, December 31, 1995. . . $ 1.136700 $1.064258
Non-qualified units outstanding, December 31, 1995 . . . . 504,642 208,124
Net asset value per non-qualified unit, December 31, 1995. $ 1.136700 $1.064258
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . $ 290,651 $ 90,145 $ 212,930 $ 40,060
--------- --------- --------- ---------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . 24,301 14,913 46,465 7,327
Administrative expense charges. . . . . . . . . . . . 3,888 2,386 7,435 1,173
--------- --------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . 28,189 17,299 53,900 8,500
--------- --------- --------- ---------
Net investment income (loss) . . . . . . . . . . . . . . 262,462 72,846 159,030 31,560
--------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain . . . . . . . . . . . . . . . . . . 15,720 508 -- 5,059
Net unrealized gain . . . . . . . . . . . . . . . . . 218,129 99,673 -- 118,031
--------- --------- --------- ---------
Net realized and unrealized gain on
investments. . . . . . . . . . . . . . . . . . . . . 233,849 100,181 -- 123,090
--------- --------- --------- ---------
Net increase in net assets from operations. . . . . . $ 496,311 $ 173,027 $ 159,030 $ 154,650
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECT SELECT CAPITAL DGPF VIPF
INTERNATIONAL EQUITY APPRECIATION INTERNATIONAL EQUITY HIGH INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 (a) 20 102
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . $ 30,771 $ 27,779 $ 19,518 $ 82,243
--------- --------- --------- ---------
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . 14,633 4,221 13,017 23,700
Administrative expense charges. . . . . . . . . . . . 2,342 675 2,083 3,792
--------- --------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . 16,975 4,896 15,100 27,492
--------- --------- --------- ---------
Net investment income (loss) . . . . . . . . . . . . . . 13,796 22,883 4,418 54,751
--------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss). . . . . . . . . . . . . . . 5,839 2,377 4,746 12,795
Net unrealized gain . . . . . . . . . . . . . . . . . 163,696 93,617 112,902 232,146
--------- --------- --------- ---------
Net realized and unrealized gain on
investments. . . . . . . . . . . . . . . . . . . . . 169,535 95,994 117,648 244,941
--------- --------- --------- ---------
Net increase in net assets from operations. . . . . . $ 183,331 $ 118,877 $ 122,066 $ 299,692
--------- --------- --------- ---------
--------- --------- --------- ---------
(a) For the period April 28, 1995 (date of initial investment) to December 31, 1995.
(b) For the period May 1, 1995 (date of initial investment) to December 31, 1995.
The accompanying notes are an integral part of these financial statements.
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECT SELECT SMALL
GOVERNMENT BOND AGGRESSIVE GROWTH SELECT GROWTH GROWTH AND INCOME CAP VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
5 6 7 8 9
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . $ 53,942 -- $ 243 $ 140,154 $ 60,489
-------- --------- --------- --------- ---------
EXPENSES:
Mortality and expense risk fees . . . . . . 9,509 $ 29,425 12,698 23,069 15,892
Administrative expense charges. . . . . . . 1,521 4,708 2,031 3,691 2,543
-------- --------- --------- --------- ---------
Total expenses . . . . . . . . . . . . . . 11,030 34,133 14,729 26,760 18,435
-------- --------- --------- --------- ---------
Net investment income (loss) . . . . . . . . . 42,912 (34,133) (14,486) 113,394 42,054
-------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain . . . . . . . . . . . . . 4,917 18,537 8,815 15,735 11,139
Net unrealized gain . . . . . . . . . . . . 31,977 605,228 158,990 335,341 137,740
-------- --------- --------- --------- ---------
Net realized and unrealized gain on
investments. . . . . . . . . . . . . . . . 36,894 623,765 167,805 351,076 148,879
-------- --------- --------- --------- ---------
Net increase in net assets from operations. $ 79,806 $ 589,632 $ 153,319 $ 464,470 $ 190,933
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
VIPF VIPF VIPF VIPF II T. ROWE
EQUITY INCOME GROWTH OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
103 104 105 106 150 (b)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . $ 255,962 $ 12,557 $ 13,917 $ 26,859 --
----------- --------- --------- --------- --------
EXPENSES:
Mortality and expense risk fees . . . . . . 60,091 52,172 28,831 22,209 $ 2,065
Administrative expense charges. . . . . . . 9,615 8,348 4,613 3,553 330
----------- --------- --------- --------- --------
Total expenses . . . . . . . . . . . . . . 69,706 60,520 33,444 25,762 2,395
----------- --------- --------- --------- --------
Net investment income (loss) . . . . . . . . . 186,256 (47,963) (19,527) 1,097 (2,395)
----------- --------- --------- --------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss). . . . . . . . . . 13,691 27,316 6,017 7,204 (85)
Net unrealized gain . . . . . . . . . . . . 1,142,858 905,617 216,313 260,490 18,742
----------- --------- --------- --------- --------
Net realized and unrealized gain on
investments. . . . . . . . . . . . . . . . 1,156,549 932,933 222,330 267,694 18,657
----------- --------- --------- --------- --------
Net increase in net assets from operations. $ 1,342,805 $ 884,970 $ 202,803 $ 268,791 $ 16,262
----------- --------- --------- --------- --------
----------- --------- --------- --------- --------
</TABLE>
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
GROWTH INVESTMENT GRADE
SUB-ACCOUNT 1 SUB-ACCOUNT 2
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/19/94* to 12/31/94 12/31/95 4/19/94* to 12/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . $ 262,462 $ 49,607 $ 72,846 $ 15,138
Net realized gain (loss) from security transactions. . . 15,720 392 508 (586)
Net unrealized gain (loss) on investments. . . . . . . . 218,129 (46,118) 99,673 (16,926)
----------- ---------- ----------- ----------
Net increase (decrease) in net assets from operations. . 496,311 3,881 173,027 (2,374)
----------- ---------- ----------- ----------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . 316,152 381,420 164,778 430,088
Terminations . . . . . . . . . . . . . . . . . . . . . . (15,059) (3,145) (21,539) (1,690)
Annuity benefits . . . . . . . . . . . . . . . . . . . (6,740) (6,031) (1,831) --
Other transfers from (to) the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . 1,536,279 607,206 1,104,368 84,894
----------- ---------- ----------- ----------
Net increase in net assets from capital transactions . . 1,830,632 979,450 1,245,776 513,292
----------- ---------- ----------- ----------
Net increase in net assets . . . . . . . . . . . . . . . 2,326,943 983,331 1,418,803 510,918
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . 983,331 -- 510,918 --
----------- ---------- ----------- ----------
End of period . . . . . . . . . . . . . . . . . . . . . $ 3,310,274 $ 983,331 $ 1,929,721 $ 510,918
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT 3 SUB-ACCOUNT 4 SUB-ACCOUNT 5
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/07/94* to 12/31/94 12/31/95 4/20/94* to 12/31/94 12/31/95 4/19/94* to 12/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSETS
FROM OPERATIONS:
Net investment
income. . . . $ 159,030 $ 26,537 $ 31,560 $ 3,975 $ 42,912 $ 11,582
Net realized
gain (loss)
from security
transactions. -- -- 5,059 4,000 4,917 (886)
Net unrealized
gain (loss) on
investments. . -- -- 118,031 (3,332) 31,977 (11,809)
------------- ------------- ------------ ------------ ------------- -------------
Net increase
(decrease) in
net assets from
operations. . 159,030 26,537 154,650 4,643 79,806 (1,113)
------------- ------------- ------------ ------------ ------------- -------------
FROM CAPITAL
TRANSACTIONS:
Net purchase
payments. . . 18,618,277 4,871,352 190,291 162,129 98,963 427,469
Terminations . (57,036) (24,228) (3,930) (96,923) (4,740) (658)
Annuity benefits -- -- -- -- -- --
Other transfers
from (to) the
General Account
of First Allmerica
Financial Life
Insurance Company
(Sponsor). . (16,130,636) (2,999,323) 778,967 126,155 686,426 (63,463)
------------- ------------- ------------ ------------ ------------- -------------
Net increase in
net assets from
capital
transactions 2,430,605 1,847,801 965,328 191,361 780,649 363,348
------------- ------------- ------------ ------------ ------------- -------------
Net increase in
net assets . 2,589,635 1,874,338 1,119,978 196,004 860,455 362,235
NET ASSETS:
Beginning of
period . 1,874,338 -- 196,004 -- 362,235 --
------------- ------------- ------------ ------------ ------------- -------------
End of period .$ 4,463,973 $ 1,874,338 $ 1,315,982 $ 196,004 $ 1,222,690 $ 362,235
------------- ------------- ------------ ------------ ------------- -------------
------------- ------------- ------------ ------------ ------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECT AGGRESSIVE GROWTH SELECT GROWTH
SUB-ACCOUNT 6 SUB-ACCOUNT 7
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/19/94* to 12/31/94 12/31/95 4/19/94* to 12/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . $ (34,133) $ (6,244) $ (14,486) $(4)
Net realized gain from security transactions . . . . . . 18,537 4,089 8,815 652
Net unrealized gain (loss) on investments. . . . . . . . 605,228 12,262 158,990 (4,851)
----------- ---------- ----------- ----------
Net increase (decrease) in net assets from operations. . 589,632 10,107 153,319 (4,203)
----------- ---------- ----------- ----------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . 528,950 649,463 217,032 201,920
Terminations . . . . . . . . . . . . . . . . . . . . . . (29,552) (80,593) (8,979) (261)
Annuity benefits . . . . . . . . . . . . . . . . . . . . -- -- -- --
Other transfers from the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . 1,551,345 660,943 868,071 232,316
Net increase in investment by First Allmerica Financial
Life Insurance Company (Sponsor). . . . . . . . . . . . -- -- -- --
----------- ---------- ----------- ----------
Net increase in net assets from capital transactions . . 2,050,743 1,229,813 1,076,124 433,975
----------- ---------- ----------- ----------
Net increase in net assets . . . . . . . . . . . . . . . 2,640,375 1,239,920 1,229,443 429,772
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . 1,239,920 -- 429,772 --
----------- ---------- ----------- ----------
End of period . . . . . . . . . . . . . . . . . . . . . $ 3,880,295 $ 1,239,920 $ 1,659,215 $ 429,772
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECT GROWTH AND INCOME SMALL CAP VALUE SELECT INTERNATIONAL EQUITY
SUB-ACCOUNT 8 SUB-ACCOUNT 9 SUB-ACCOUNT 11
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/19/94* to 12/31/94 12/31/95 4/19/94* to 12/31/94 12/31/95 5/17/94* to 12/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income
(loss) . . . . . . . . . . $ 113,394 $ 25,400 $ 42,054 $ (948) $ 13,796 $ (561)
Net realized gain from
security transactions . . 15,735 1,061 11,139 1,342 5,839 298
Net unrealized gain (loss)
on investments . . . . . . 335,341 (32,278) 137,740 (15,300) 163,696 (11,470)
------------- ------------- ------------ ------------ ------------- -------------
Net increase (decrease)
in net assets from
operations. . . . . . . . . 464,470 (5,817) 190,933 (14,906) 183,331 (11,733)
------------- ------------- ------------ ------------ ------------- -------------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . 227,098 498,623 230,638 525,737 274,500 162,604
Terminations . . . . . . . . (21,291) (5,393) (16,573) (49,421) (18,624) (1,907)
Annuity benefits . . . . . . (9,992) (4,239) -- -- -- --
Other transfers from the
General Account of First
Allmerica Financial Life
Insurance Company (Sponsor) 1,359,925 373,306 645,280 313,757 1,494,797 277,283
Net increase in investment
by First Allmerica Financia
Life Insurance Company
(Sponsor). . . . . . . . . -- -- -- -- -- 100
------------- ------------- ------------ ------------ ------------- -------------
Net increase in net assets
from capital transactions 1,555,740 862,297 859,345 790,073 1,750,673 438,080
------------- ------------- ------------ ------------ ------------- -------------
Net increase in net assets. 2,020,210 856,480 1,050,278 775,167 1,934,004 426,347
NET ASSETS:
Beginning of period . . . . 856,480 -- 775,167 -- 426,347 --
------------- ------------- ------------ ------------ ------------- -------------
End of period . . . . . . $ 2,876,690 $ 856,480 $ 1,825,445 $ 775,167 $ 2,360,351 $ 426,347
------------- ------------- ------------ ------------ ------------- -------------
------------- ------------- ------------ ------------ ------------- -------------
</TABLE>
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
STATEMENTS OF CHANGES IN NET ASSETS, CONTINUED
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SELECT CAPITAL APPRECIATION DGPF INTERNATIONAL EQUITY
SUB-ACCOUNT 12 SUB-ACCOUNT 20
PERIOD FROM YEAR ENDED PERIOD FROM
4/28/95* to 12/31/95 12/31/95 4/19/94* to 12/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . $ 22,883 $ 4,418 $ (2,886)
Net realized gain (loss) from security transactions. . . . 2,377 4,746 131
Net unrealized gain (loss) on investments. . . . . . . . . 93,617 112,902 (13,121)
----------- ------------- ------------
Net increase (decrease) in net assets from operations. . . 118,877 122,066 (15,876)
----------- ------------- ------------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . . 203,616 152,119 366,840
Terminations . . . . . . . . . . . . . . . . . . . . . . . (182) (7,815) (593)
Annuity benefits . . . . . . . . . . . . . . . . . . . . . -- -- --
Other transfers from the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . . 1,155,437 524,668 312,686
Net increase in investment by First Allmerica Financial
Life Insurance Company (Sponsor) . . . . . . . . . . . . 200 -- --
----------- ------------- ------------
Net increase in net assets from capital transactions . . . 1,359,071 668,972 678,933
----------- ------------- ------------
Net increase in net assets . . . . . . . . . . . . . . . . 1,477,948 791,038 663,057
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . -- 663,057 --
----------- ------------- ------------
End of period . . . . . . . . . . . . . . . . . . . . . . . $ 1,477,948 $1,454,095 $ 663,057
----------- ------------- ------------
----------- ------------- ------------
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
VIPF HIGH INCOME VIPF EQUITY INCOME VIPF GROWTH
SUB-ACCOUNT 102 SUB-ACCOUNT 103 SUB-ACCOUNT 104
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/19/94* to 12/31/94 12/31/95 4/19/94* to 12/31/94 12/31/95 4/19/94* to 12/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . $ 54,751 $ (6,117) $ 186,256 $ 13,066 $ (47,963) $ (11,715)
Net realized gain (loss)
from security transactions. . 12,795 (664) 13,691 854 27,316 5,749
Net unrealized gain (loss) on
investments . . . . . . . . . 232,146 (3,688) 1,142,858 26,109 905,617 100,347
---------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations. . . . 299,692 (10,469) 1,342,805 40,029 884,970 94,381
---------- ----------- ----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . 350,104 616,980 913,420 1,446,222 976,256 1,197,494
Terminations . . . . . . . . . (164,653) (1,996) (123,414) (9,095) (97,127) (82,084)
Annuity benefits . . . . . . . -- (1,265) -- (1,307) (4,079) (1,348)
Other transfers from the General
Account of First Allmerica
Financial Life Insurance Company
(Sponsor) . . . . . . . . . . 1,529,498 377,559 3,693,687 900,975 3,249,188 878,405
Net increase in investment by
First Allmerica Financial
Life Insurance Company (Sponsor) -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets from
capital transactions . . . . 1,714,949 991,278 4,483,693 2,336,795 4,124,238 1,992,467
---------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets . . 2,014,641 980,809 5,826,498 2,376,824 5,009,208 2,086,848
NET ASSETS:
Beginning of period . . . . . 980,809 -- 2,376,824 -- 2,086,848 --
---------- ----------- ----------- ----------- ----------- -----------
End of period . . . . . . . . $2,995,450 $ 980,809 $ 8,203,322 $ 2,376,824 $ 7,096,056 $ 2,086,848
---------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
VIPF OVERSEAS VIPF II ASSET MANAGER
SUB-ACCOUNT 105 SUB-ACCOUNT 106
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/95 4/19/94* to 12/31/94 12/31/95 5/17/94* to 12/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . $ (19,527) $ (8,623) $ 1,097 $ (5,194)
Net realized gain (loss) from security transactions. . . 6,017 2,088 7,204 868
Net unrealized gain (loss) on investments. . . . . . . . 216,313 (40,454) 260,490 (29,753)
---------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations. . 202,803 (46,989) 268,791 (34,079)
---------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . 377,509 1,016,204 353,452 695,313
Terminations . . . . . . . . . . . . . . . . . . . . . . (42,130) (99,805) (87,532) (95,828)
Annuity benefits . . . . . . . . . . . . . . . . . . . (1,149) -- -- (1,288)
Other transfers from the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . 768,445 790,613 545,105 657,922
Net increase in investment by First Allmerica Financial
Life Insurance Company (Sponsor). . . . . . . . . . . . -- -- -- 100
---------- ----------- ----------- -----------
Net increase in net assets from capital transactions . . 1,102,675 1,707,012 811,025 1,256,219
---------- ----------- ----------- -----------
Net increase in net assets . . . . . . . . . . . . . . . 1,305,478 1,660,023 1,079,816 1,222,140
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . 1,660,023 -- 1,222,140 --
---------- ----------- ----------- -----------
End of period . . . . . . . . . . . . . . . . . . . . . $2,965,501 $ 1,660,023 $ 2,301,956 $ 1,222,140
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
<CAPTION>
T. ROWE INTERNATIONAL STOCK
----------------------------
SUB-ACCOUNT 150
PERIOD FROM
5/1/95* to 12/31/95
----------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . $ (2,395)
Net realized gain (loss) from security transactions. . . (85)
Net unrealized gain (loss) on investments. . . . . . . . 18,742
-----------
Net increase (decrease) in net assets from operations. . 16,262
-----------
FROM CAPITAL TRANSACTIONS:. . . . . . . . . . . . . . . .
Net purchase payments. . . . . . . . . . . . . . . . . . 50,924
Terminations . . . . . . . . . . . . . . . . . . . . . . --
Annuity benefits . . . . . . . . . . . . . . . . . . . --
Other transfers from the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . 509,223
Net increase in investment by First Allmerica Financial
Life Insurance Company (Sponsor). . . . . . . . . . . . 200
-----------
Net increase in net assets from capital transactions . . 560,347
-----------
Net increase in net assets . . . . . . . . . . . . . . . 576,609
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . --
-----------
End of period . . . . . . . . . . . . . . . . . . . . . $ 576,609
-----------
-----------
</TABLE>
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
NOTE 1 - ORGANIZATION
Separate Account VA-K - ExecAnnuity Plus (VA-K) is a separate investment
account of First Allmerica Financial Life Insurance Company (the Company).
Effective October 16, 1995, concurrent with the demutualization, the Company's
name was changed from State Mutual Life Assurance Company of America. VA-K was
established on April 1, 1994 for the purpose of separating from the general
assets of the Company those assets used to fund certain variable annuity
policy issued by the Company. Under applicable insurance law, the assets and
liabilities of VA-K are clearly identified and distinguished from the other
assets and liabilities of the Company. VA-K cannot be charged with liabilities
arising out of any other business of the Company.
VA-K is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VA-K currently offers eighteen Sub-
Accounts under the ExecAnnuity Plus policy. Each Sub-Account invests
exclusively in a corresponding investment portfolio of the Allmerica Investment
Trust (the Trust) managed by Allmerica Investment Management Company, Inc., a
wholly-owned subsidiary of the Company, or of the Variable Insurance Products
Fund (VIPF) or of the Variable Insurance Products Fund II (VIPF II) managed by
Fidelity Management & Research Company (Fidelity Management), or of the Delaware
Group Premium Fund, Inc. (DGPF) managed by Delaware International Advisors, LTD
or of T. Rowe Price International Series, Inc. (T. Rowe) managed by Price-
Fleming. The Trust, VIPF, VIPF II, DGPF, and T. Rowe (the Funds) are open-end,
diversified series management investment companies registered under the 1940
Act.
Separate Account VA-K has two types of variable annuity policy, "qualified"
policy and "non-qualified" policy. A qualified policy is one that is
purchased in connection with a retirement plan which meets the requirements of
Section 401, 403, 408, or 457 of the Internal Revenue Code, while a non-
qualified policy is one that is not purchased in connection with one of the
indicated retirement plans. The tax treatment for certain partial redemptions
or surrenders will vary according to whether they are made from a qualified
policy or a non-qualified policy.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Investments - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, VIPF, VIPFII, DGPF, or T.
Rowe. Net realized gains and losses on securities sold are determined on the
average cost method. Dividends and capital gain distributions are recorded on
the ex-dividend date and are reinvested in additional shares of the respective
investment portfolio of the Trust, VIPF, VIPFII, or DGPF, or T. Rowe at net
asset value.
Federal Income Taxes - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return. The Company anticipates no tax liability resulting from the
operations of VA-K. Therefore, no provision for income taxes has been charged
against VA-K.
Annuitant Mortality Fluctuation Reserve - A strengthening reserve required
for doing business in the state of New York. The purpose of the reserve is to
provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995, CONTINUED
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, VIPF, VIPFII, DGPF, and T. Rowe at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Portfolio Information
Sub- Investment Number of Aggregate Net Asset
Portfolio Portfolio Shares Cost Value Per Share
<S> <C> <C> <C> <C>
Allmerica Investment Trust:
1 Growth . . . . . . . . . . . . . . . . . . . . . . 1,523,542 $ 3,143,217 $ 2,176
2 Investment Grade Income. . . . . . . . . . . . . . 1,727,624 1,847,009 1,117
3 Money Market . . . . . . . . . . . . . . . . . . . 4,385,441 4,385,441 1,000
4 Equity Index . . . . . . . . . . . . . . . . . . . 720,799 1,202,201 1,827
5 Government Bond. . . . . . . . . . . . . . . . . . 1,154,221 1,205,616 1,062
6 Select Aggressive Growth . . . . . . . . . . . . . 2,097,610 3,258,894 1,848
7 Select Growth. . . . . . . . . . . . . . . . . . . 1,213,348 1,506,935 1,369
8 Select Growth and Income . . . . . . . . . . . . . 2,267,385 2,571,982 1,268
9 Small Cap Value. . . . . . . . . . . . . . . . . . 1,465,467 1,691,808 1,238
11 Select International Equity. . . . . . . . . . . . 2,072,731 2,202,396 1,136
12 Select Capital Appreciation. . . . . . . . . . . . 1,064,631 1,363,862 1,369
Delaware Group Premium Fund:
20 International Equity . . . . . . . . . . . . . . . 110,994 1,355,354 13,110
Fidelity Variable Insurance Products Fund:
102 High Income. . . . . . . . . . . . . . . . . . . . 248,860 2,770,303 12,050
103 Equity Income. . . . . . . . . . . . . . . . . . . 425,417 7,028,816 19,270
104 Growth . . . . . . . . . . . . . . . . . . . . . . 243,074 6,091,784 29,200
105 Overseas . . . . . . . . . . . . . . . . . . . . . 174,300 2,795,957 17,050
Fidelity Variable Insurance Products Fund II:
106 Asset Manager. . . . . . . . . . . . . . . . . . . 145,765 2,070,892 15,790
T. Rowe Price International Series, Inc.:
150 International Stock. . . . . . . . . . . . . . . . 50,0795 45,145 11,260
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .20% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account but are paid to
the Company on a monthly basis. Net purchase payments represent gross purchase
payments less applicable premium taxes.
A policy fee is currently deducted on the policy anniversary date and upon
full surrender of the policy when the accumulated value is $50,000 or less. The
policy fee is the lesser of $30 or 3% of the Accumulated Value under the Policy
on the policy anniversary or full surrender date. The policy fee is waived for
policy originally issued as part of a 401(k) plan. For the year ended December
31, 1995, policy fees deducted from accumulated value in VA-K amounted to
$15,159.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
VA-K, and does not receive any compensation for sales of the VA-K - ExecAnnuity
Plus policy. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of policy have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale. For the year ended December 31, 1995, the Company received $14,866 for
contingent deferred sales charges applicable to VA-K.
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995, CONTINUED
NOTE 5 - POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners and sponsor were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994
UNITS AMOUNT UNITS AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Sub-Account 1 -- Growth
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,664,543 $ 2,056,052 973,635 $ 1,006,438
Redemption of units. . . . . . . . . . . . . . . . . . . . . (175,917) (225,420) (26,149) (26,988)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,488,626 $ 1,830,632 947,486 $ 979,450
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 2 -- Investment Grade Income
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,211,736 $ 1,299,711 588,988 $ 585,916
Redemption of units. . . . . . . . . . . . . . . . . . . . . (50,501) (53,935) (73,081) (72,624)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,161,235 $ 1,245,776 515,907 $ 513,292
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 3 -- Money Market
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 22,422,170 $23,787,896 6,253,765 $ 6,314,460
Redemption of units. . . . . . . . . . . . . . . . . . . . . (20,065,591) (21,357,291) (4,416,485) (4,466,659)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 2,356,579 $ 2,430,605 1,837,280 $ 1,847,801
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 4 -- Equity Index
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 823,718 $ 1,047,559 280,383 $ 288,284
Redemption of units. . . . . . . . . . . . . . . . . . . . . (66,179) (82,231) (91,011) (96,923)
----------- ----------- ----------- -----------
Net increase.. . . . . . . . . . . . . . . . . . . . . . . . 757,539 $ 965,328 189,372 $ 191,361
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 5 -- Government Bond
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,123,391 $ 1,201,341 607,981 $ 609,311
Redemption of units. . . . . . . . . . . . . . . . . . . . . (387,842) (420,692) (245,330) (245,963)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 735,549 $ 780,649 362,651 $ 363,348
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 6 -- Select Aggressive Growth
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,874,069 $ 2,267,121 1,324,942 $ 1,348,185
Redemption of units . . . . . . . . . . . . . . . . . . . . (178,864) (216,378) (113,493) (118,372)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,695,205 $ 2,050,743 1,211,449 $ 1,229,813
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 7 -- Select Growth
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 941,659 $ 1,163,230 409,429 $ 437,108
Redemption of units. . . . . . . . . . . . . . . . . . . . . (70,514) (87,106) (2,930) (3,133)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 871,145 $ 1,076,124 406,499 $ 433,975
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 8 -- Select Growth and Income
Issuance of units . . . . . . . . . . . . . . . . . . . . . 1,531,533 $ 1,775,529 880,523 $ 914,669
Redemption of units. . . . . . . . . . . . . . . . . . . . . (189,585) (219,789) (49,023) (52,372)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,341,948 $ 1,555,740 831,500 $ 862,297
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 9 -- Small Cap Value
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,049,942 $ 1,105,587 852,043 $ 848,505
Redemption of units. . . . . . . . . . . . . . . . . . . . . (230,770) (246,242) (57,503) (58,432)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 819,172 $ 859,345 794,540 $ 790,073
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 11 -- Select International Equity
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,796,367 $ 1,905,681 462,096 $ 454,346
Redemption of units. . . . . . . . . . . . . . . . . . . . . (148,937) (155,008) (16,137) (16,266)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,647,410 $ 1,750,673 445,959 $ 438,080
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 12 -- Select Capital Appreciation
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,090,616 $ 1,383,933 -- --
Redemption of units. . . . . . . . . . . . . . . . . . . . . (21,582) (24,862) -- --
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,069,034 $ 1,359,071 -- --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 20 -- DGPF International Equity
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 814,692 $ 857,745 669,162 $ 680,672
Redemption of units. . . . . . . . . . . . . . . . . . . . . (178,396) (188,773) (1,704) (1,739)
----------- ----------- ----------- -----------
Net increase.. . . . . . . . . . . . . . . . . . . . . . . . 636,296 $ 668,972 667,458 $ 678,933
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 102 -- VIPF High Income
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,836,456 $ 2,043,857 1,067,892 $ 1,073,365
Redemption of units. . . . . . . . . . . . . . . . . . . . . (291,273) (328,908) (82,764) (82,087)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,545,183 $ 1,714,949 985,128 $ 991,278
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
SEPARATE ACCOUNT VA-K - EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995, CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994
UNITS AMOUNT UNITS AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sub-Account 103 -- VIPF Equity Income
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 3,810,750 $ 4,852,342 2,278,130 $ 2,405,685
Redemption of units. . . . . . . . . . . . . . . . . . . . . (287,301) (368,649) (63,794) (68,890)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 3,523,449 $ 4,483,693 2,214,336 $ 2,336,795
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 104 -- VIPFGrowth
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 3,272,833 $ 4,486,990 2,098,856 $ 2,155,899
Redemption of units. . . . . . . . . . . . . . . . . . . . . (264,593) (362,752) (155,259) (163,432)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 3,008,240 $ 4,124,238 1,943,597 $ 1,992,467
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 105 -- VIPFOverseas
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,572,364 $ 1,575,532 1,822,426 $ 1,836,371
Redemption of units. . . . . . . . . . . . . . . . . . . . . (465,575) (472,857) (125,434) (129,359)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 1,106,789 $ 1,102,675 1,696,992 $ 1,707,012
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 106 -- VIPFII Asset Manager
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 1,187,494 $ 1,228,593 1,396,465 $ 1,415,396
Redemption of units. . . . . . . . . . . . . . . . . . . . . (402,122) (417,568) (156,715) (159,177)
----------- ----------- ----------- -----------
Net increase . . . . . . . . . . . . . . . . . . . . . . . . 785,372 $ 811,025 1,239,750 $ 1,256,219
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Sub-Account 150 -- T. Rowe International Stock
Issuance of units. . . . . . . . . . . . . . . . . . . . . . 595,443 $ 616,476 -- --
Redemption of units. . . . . . . . . . . . . . . . . . . . . (53,649) (56,129) -- --
----------- ----------- ----------- -----------
Net Increase . . . . . . . . . . . . . . . . . . . . . . . . 541,794 $ 560,347 -- --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VA-K
satisfies the current requirements of the regulations, and it intends that VA-K
will continue to meet such requirements.
NOTE 7 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, VIPF, VIPFII, DGPF
and T. Rowe shares by VA-K during the year ended December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
SUB-
ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
<S> <C> <C> <C>
Allmerica Investment Trust:
1 Growth . . . . . . . . . . . . . . . . . . . . . . $ 2,287,933 $ 178,704
2 Investment Grade Income. . . . . . . . . . . . . . 1,339,339 28,315
3 Money Market . . . . . . . . . . . . . . . . . . . 14,022,114 11,456,777
4 Equity Index . . . . . . . . . . . . . . . . . . . 1,079,474 81,562
5 Government Bond. . . . . . . . . . . . . . . . . . 1,159,849 333,632
6 Select Aggressive Growth . . . . . . . . . . . . . 2,138,039 124,340
7 Select Growth. . . . . . . . . . . . . . . . . . . 1,156,463 92,392
8 Select Growth and Income . . . . . . . . . . . . . 1,881,538 207,949
9 Small Cap Value. . . . . . . . . . . . . . . . . . 1,077,325 187,021
11 Select International Equity. . . . . . . . . . . . 1,888,687 128,911
12 Select Capital Appreciation. . . . . . . . . . . . 1,416,296 54,811
Delaware Group Premium Fund:
20 International Equity . . . . . . . . . . . . . . . 845,113 170,804
Fidelity Variable Insurance Products Fund:
102 High Income. . . . . . . . . . . . . . . . . . . . 1,987,258 214,990
103 Equity Income. . . . . . . . . . . . . . . . . . . 4,804,307 140,024
104 Growth . . . . . . . . . . . . . . . . . . . . . . 4,243,210 165,427
105 Overseas . . . . . . . . . . . . . . . . . . . . . 1,340,772 250,029
Fidelity Variable Insurance Products Fund II:
106 Asset Manager. . . . . . . . . . . . . . . . . . . 1,118,595 305,430
T. Rowe Price International Series, Inc.
150 International Stock. . . . . . . . . . . . . . . . 646,038 100,808
------------ ------------
Totals . . . . . . . . . . . . . . . . . . . . . . $ 44,432,350 $ 14,221,926
------------ ------------
------------ ------------
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life
Insurance Company and Contract Owners
of Separate Account VA-K - ExecAnnuity Plus
of First Allmerica Financial Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12, 20, 102, 103, 104, 105, 106, and 150)
constituting the Separate Account VA-K - ExecAnnuity Plus of First Allmerica
Financial Life Insurance Company at December 31, 1995, the results of each of
their operations and the changes in each of their net assets for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of First Allmerica Financial Life
Insurance Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at December 31,
1995 by correspondence with the Funds, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP Boston, Massachusetts
February 23, 1996
