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File Nos. 333-87105
811-8114
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1933
Pre-effective Amendment No. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Mary Eldridge, Secretary
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
__ immediately upon filing pursuant to Paragraph (b) of Rule 485
__ on (date) pursuant to Paragraph (b) of Rule 485
__ 60 days after filing pursuant to Paragraph (a) (1) of Rule 485
__ on (date) pursuant to Paragraph (a) (1) of Rule 485
__ this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). No filing fee is
submitted as a filing fee is not required for this type of filing. Registrant
will file its notice pursuant to Rule 24f-2 for its fiscal year ending December
31, 1999 on or before March 1, 2000.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such date or
dates as the Commission, acting pursuant to said section 8(a), may determine.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
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FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
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1...........................Cover Page
2...........................Special Terms
3...........................Summary of Fees and Expenses; Summary of the Contract Features
4...........................Performance Information
5...........................Description of the Companies, the Variable Accounts and the Underlying
Funds
6...........................Charges and Deductions
7...........................Description of the Contract - The Accumulation Phase
8...........................Electing the Annuity Date; Description of Annuity Payout Options; Variable
Annuity Benefit Payments
9...........................Death Benefit
10..........................Payments; Computation of Values; Distribution
11..........................Surrender and Withdrawals; Withdrawals after the Annuity Date
12..........................Federal Tax Considerations
13..........................Legal Matters
14..........................Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
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15..................................Cover Page
16..................................Table of Contents
17..................................General Information and History
18..................................Services
19..................................Underwriters
20..................................Underwriters
21..................................Performance Information
22..................................Annuity Benefit Payments
23..................................Financial Statements
</TABLE>
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
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<C> <S>
This Prospectus provides important information about a
variable annuity contract issued by Allmerica Financial Life
Insurance and Annuity Company (in all jurisdictions except
New York) and by First Allmerica Financial Life Insurance
Company (in New York). The contract is a flexible payment
deferred combination variable and fixed annuity offered on
PLEASE READ THIS both a group and individual basis.
PROSPECTUS CAREFULLY
BEFORE INVESTING AND
KEEP IT FOR FUTURE
REFERENCE.
The Variable Account, known as Separate Account VA-K, is
subdivided into Sub-Accounts, each investing exclusively in
shares of one of the following funds:
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<TABLE>
<S> <C>
ANNUITIES INVOLVE ALLMERICA INVESTMENT TRUST
RISKS INCLUDING -----------------------
POSSIBLE LOSS OF Equity Index Fund
PRINCIPAL. Money Market Fund
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<C> <S>
THIS ANNUITY IS In most jurisdictions, values may also be allocated on a
NOT: fixed basis to the Fixed Account, which is part of the
- - A BANK DEPOSIT OR Company's General Account and pays an interest rate
OBLIGATION; guaranteed for one year from the time a payment is received.
- - FEDERALLY INSURED; The Guarantee Period Accounts offer fixed rates of interest
- - ENDORSED BY ANY for specified periods. A Market Value Adjustment is applied
BANK OR to payments removed from a Guarantee Period Account before
GOVERNMENTAL the end of the specified period. The Market Value Adjustment
AGENCY may be positive or negative. Payments allocated to a
Guarantee Period Account are held in the Company's Separate
Account GPA (except in California where they are allocated
to the General Account).
A Statement of Additional Information dated ____ containing
more information about this annuity is on file with the
Securities and Exchange Commission and is incorporated by
reference into this Prospectus. A copy may be obtained free
of charge by calling Allmerica Investments, Inc. at
1-800-533-7881. The Table of Contents of the Statement of
Additional Information is listed on page 3 of this
Prospectus.
This Prospectus and the Statement of Additional Information
can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THE
INFORMATION IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
DATED ________, ____
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TABLE OF CONTENTS
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<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 6
SUMMARY OF CONTRACT FEATURES................................ 8
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, AND
THE UNDERLYING FUNDS....................................... 12
INVESTMENT OBJECTIVES AND POLICIES.......................... 13
INVESTMENT ADVISORY SERVICES................................ 14
DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE....... 15
A. Payments............................................. 15
B. Computation of Values................................ 15
The Accumulation Unit............................... 16
Net Investment Factor............................... 16
C. Right to Cancel...................................... 16
D. Transfer Privilege................................... 17
Automatic Transfers (Dollar Cost Averaging)......... 17
Automatic Account Rebalancing....................... 18
E. Surrender and Withdrawals............................ 18
Systematic Withdrawals.............................. 19
Life Expectancy Distributions....................... 19
F. Death Benefit........................................ 20
Standard Death Benefit.............................. 20
Optional Enhanced Death Benefit Rider............... 20
Payment of the Death Benefit Prior to the Annuity
Date................................................ 21
G. The Spouse of the Owner as Beneficiary............... 21
H. Assignment........................................... 22
ANNUITIZATION -- THE PAYOUT PHASE........................... 23
A. Electing the Annuity Date............................ 23
B. Choosing the Annuity Payout Option................... 24
Fixed Annuity Payout Options........................ 24
Variable Annuity Payout Options..................... 24
C. Description of Annuity Payout Options................ 24
D. Variable Annuity Benefit Payments.................... 25
The Annuity Unit.................................... 25
Determination of the First Annuity Benefit
Payment............................................. 25
Determination of the Number of Annuity Units........ 26
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 26
Payment of Annuity Benefit Payments................. 26
E. Transfers of Annuity Units........................... 26
F. Withdrawals after the Annuity Date................... 27
Calculation of Proportionate Reduction.............. 28
Calculation of Present Value........................ 29
Deferral of Withdrawals............................. 30
G. Reversal of Annuitization............................ 30
H. NORRIS Decision...................................... 31
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CHARGES AND DEDUCTIONS...................................... 32
A. Variable Account Deductions.......................... 32
Mortality and Expense Risk Charge................... 32
Administrative Expense Charge....................... 32
Other Charges....................................... 32
B. Contract Fee......................................... 33
C. Optional Rider Charge................................ 33
D. Premium Taxes........................................ 33
E. Transfer Charge...................................... 34
GUARANTEE PERIOD ACCOUNTS................................... 35
FEDERAL TAX CONSIDERATIONS.................................. 37
A. General.............................................. 37
B. Qualified and Non-Qualified Contracts................ 38
C. Taxation of the Contract in General.................. 38
Withdrawals Prior to Annuitization.................. 38
Withdrawals After Annuitization..................... 38
Annuity Payouts After Annuitization................. 39
Penalty on Distribution............................. 39
Assignments or Transfers............................ 39
Nonnatural Owners................................... 39
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations............. 40
D. Tax Withholding...................................... 40
E. Individual Retirement Annuities...................... 40
STATEMENTS AND REPORTS...................................... 40
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 41
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 42
VOTING RIGHTS............................................... 42
DISTRIBUTION................................................ 42
LEGAL MATTERS............................................... 43
YEAR 2000 COMPLIANCE........................................ 43
FURTHER INFORMATION......................................... 43
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT...... A-1
APPENDIX B -- PERFORMANCE INFORMATION....................... B-1
APPENDIX C -- THE MARKET VALUE ADJUSTMENT................... C-1
APPENDIX D -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND
PAYMENT WITHDRAWALS........................................ D-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY.............................
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY....................................................
SERVICES....................................................
UNDERWRITERS................................................
ANNUITY BENEFIT PAYMENTS....................................
PERFORMANCE INFORMATION.....................................
FINANCIAL STATEMENTS........................................
</TABLE>
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SPECIAL TERMS
ACCUMULATED VALUE: the total dollar amount of all values in the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts credited to the Contract on
any day before the Annuity Date.
ACCUMULATION UNIT: a measure used to calculate the value of a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract whose life is used to determine
the duration of annuity benefit payments involving a life contingency. Joint
Annuitants are permitted and, unless otherwise indicated, any reference to
Annuitant shall include Joint Annuitants.
ANNUITY BENEFIT PAYMENT CHANGE FREQUENCY: the frequency (monthly, quarterly,
semi-annually or annually) that changes due to investment performance will be
reflected in the dollar value of an annuity benefit payment under a variable
annuity payout option.
ANNUITY DATE: the date specified in the Contract or a date elected later by the
Owner to begin annuity benefit payments. This date must be at least one year
after the Issue Date and may not be later than the Owner's (or youngest Joint
Owner's) 99th birthday.
ANNUITY UNIT: a measure used to calculate annuity benefit payments under a
variable payout option.
ANNUITY VALUE: the value of the amount applied under an annuity payout option.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to either Allmerica Financial Life Insurance and Annuity Company or
First Allmerica Financial Life Insurance Company.
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
issue date or on any anniversary of the Issue Date.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option with annuity benefit payments
that are fixed in amount and guaranteed throughout the annuity benefit payment
period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account that corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and Contract
anniversaries.
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.
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OWNER (YOU): the person, persons (Joint Owners) or entity entitled to exercise
the rights and privileges under this Contract. Unless otherwise indicated, any
reference to Owner shall include Joint Owners.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding fund of Allmerica Investment Trust.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, rider charges and Market Value
Adjustment.
UNDERLYING FUND (OR FUNDS): an investment portfolio of the Allmerica Investment
Trust in which a Sub-Account invests.
VALUATION DATE: a day on which the 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 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 unit value of the Sub-Accounts may be affected
materially.
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 the assets are not chargeable with
liabilities arising out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of the Underlying Funds.
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SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will incur directly or indirectly
under the Allmerica _________ Advantage Contract. The purpose of the following
tables is to help you understand these various charges. The tables show
(1) charges under the Contract, (2) annual expenses of the Sub-Accounts, and
(3) annual expenses of the Funds during the accumulation phase. In addition to
the charges and expenses described below, premium taxes are applicable in some
states and are deducted as described under "D. Premium Taxes."
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(1) CONTRACT CHARGES: CHARGE
- --------------------- ------
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TRANSFER CHARGE: None
The Company currently does not charge for processing
transfers and guarantees that the first 12 transfers in a
Contract year will not be subject to 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: $35*
The fee is deducted annually and upon surrender prior to
the Annuity Date when Accumulated Value is less than
$75,000.
OPTIONAL RIDER CHARGE:
If the Enhanced Death Benefit Rider is elected, 1/12th of
the annual charge will be deducted pro rata on a monthly
basis at the end of each Contract month and at termination
of the Rider. The charge for this Rider on an annual basis
as a percentage of Accumulated Value is:
5% Enhanced Death Benefit Rider With Annual Step-up: 0.25%
* The fee may be lower in some jurisdictions. See Contract
Specifications for specific charge.
(2) ANNUAL SUB-ACCOUNT EXPENSES:
- ------------------------------------------------------------
(on an annual basis as a percentage of average daily net
assets)
Mortality and Expense Risk Charge: 0.65%
Administrative Expense Charge: 0.15%
------
Total Annual Expenses: 0.80%
</TABLE>
(3) ANNUAL UNDERLYING FUND EXPENSES: The following table shows the expenses of
the Underlying Funds as a percentage of average daily net assets for the year
ended December 31, 1998. For more information concerning fees and expenses, see
the prospectuses for the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL FUND EXPENSES
(AFTER ANY VOLUNTARY EXPENSES (AFTER (AFTER ANY WAIVERS/
UNDERLYING FUND WAIVERS) ANY REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Equity Index Fund...................... 0.29% 0.07% 0.36%(1)
Money Market Fund...................... 0.26% 0.06% 0.32%(1)
</TABLE>
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 0.60%
for the Money Market Fund and Equity Index Fund. The total operating expenses of
these Funds of the Trust were less than their respective expense limitations
throughout 1998.
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
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EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay 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. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the examples by a
method designed to show the average impact on an investment in the Variable
Account. The total Contract fees collected are divided by the total average net
assets attributable to the Contracts. The resulting percentage is 0.04%, and the
amount of the Contract fee is assumed to be $0.40 in the examples. The Contract
fee is only deducted when the Accumulated Value is less than $75,000. Because
the expenses of the Underlying Funds differ, separate examples are used to
illustrate the expenses incurred by an Owner on an investment in the various
Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
(1) At the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming a 5% annual return on assets, and no
Riders.
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<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity Index Fund.......................................... $12 $37 $64 $142
Money Market Fund.......................................... $12 $36 $62 $138
</TABLE>
(2) At the end of the applicable time period, you would have paid the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and
election at issue of the 5% Enhanced Death Benefit Rider With Annual Step-Up.
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity Index Fund.......................................... $14 $45 $78 $170
Money Market Fund.......................................... $14 $44 $75 $166
</TABLE>
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SUMMARY OF CONTRACT FEATURES
WHAT IS THE ALLMERICA __________ ADVANTAGE VARIABLE ANNUITY?
The Allmerica __________ Advantage variable annuity contract ("Contract") is an
insurance contract designed to help you, the Owner, accumulate assets for your
retirement or other important financial goals on a tax-deferred basis. The
Contract may be purchased up to age 90 of the oldest Owner or, if the Owner is
not a natural person, the oldest Annuitant. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:
- a customized investment portfolio;
- experienced professional investment advisers;
- tax deferral on earnings;
- guarantees that can protect your family;
- withdrawals during the accumulation and annuitization phases;
- income that you can receive for life.
WHAT HAPPENS IN THE ACCUMULATION PHASE?
The Contract has two phases: an accumulation phase and, if you choose to
annuitize, an annuity payout phase (described below). During the accumulation
phase, you may allocate your initial payment and any additional payments to the
combination of portfolios of securities ("Underlying Funds") under your
Contract, to the Guarantee Period Accounts, and to the Fixed Account. You select
the investment options most appropriate for your investment needs. As those
needs change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Underlying Funds and any accumulations in the Guarantee
Period Accounts and the Fixed Account. Generally, you do not pay taxes on any
earnings under the Contract until you withdraw money. In addition, during the
accumulation phase, your beneficiaries receive certain protections in the event
of your death. See discussion below: WHAT HAPPENS UPON MY DEATH DURING THE
ACCUMULATION PHASE?
WHAT HAPPENS UPON MY DEATH DURING THE ACCUMULATION PHASE?
If you or a Joint Owner dies before the Annuity Date, a standard death benefit
will be paid to the beneficiary. (No death benefit is payable at the death of
any Annuitant except when the Owner is not a natural person.) An optional
Enhanced Death Benefit Rider is also available at issue for a separate monthly
charge. See "F. Death Benefit" under DESCRIPTION OF THE CONTRACT -- THE
ACCUMULATION PHASE.
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on one of the numerous annuity payout options available under the
Contract. You choose:
- the annuity payout option;
- the date annuity benefit payments begin but no earlier than 1 year after
the Issue Date; and
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- whether you want variable annuity benefit payments based on the investment
performance of the Underlying Funds, fixed-amount annuity benefit payments
with payment amounts guaranteed by the Company, or a combination of
fixed-amount and variable annuity benefit payments.
You may also take withdrawals during the annuity payout phase. The type of
withdrawal and the number of withdrawals that may be made each calendar year
depend upon whether the Owner annuitizes under an annuity payout option with
payments based on the life of one or more Annuitants with no guaranteed payments
(a "Life" annuity payout option), under a life annuity payout option that in
part provides for a guaranteed number of payments (a "Life With Period Certain"
or "Life With Cash Back" annuity payout option), or an annuity payout option
based on a guaranteed number of payments (a "Period Certain" annuity payout
option). Under a Life annuity payout option, the Owner may make one Payment
Withdrawal each calendar year. Under a Life with Period Certain or Life with
Cash Back annuity payout option, the Owner may make one Payment Withdrawal and
one Present Value Withdrawal in each calendar year. Under a Period Certain
annuity payout option, the Owner may make multiple Present Value Withdrawals
each calendar year. For more information, see "F. Withdrawals After the Annuity
Date" under ANNUITIZATION -- THE PAYOUT PHASE. In addition, if you choose a
variable option, you may transfer among the available Sub-Accounts.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
New York) and First Allmerica Financial Life Insurance Company (in New York).
Each Contract has an Owner (or an Owner and a Joint Owner), an Annuitant (or an
Annuitant and a Joint Annuitant) and one or more beneficiaries. As Owner, you
may:
- make payments
- choose investment allocations
- choose annuity payout options
- receive annuity benefit payments (or designate someone else to receive
annuity benefit payments)
- select the Annuitant and beneficiary.
The Annuitant is the person whose life is used to determine the duration of
annuity benefit payments involving a life contingency. There must be at least
one Annuitant at all times. If an Annuitant dies and a replacement is not named,
the Owner will become the new Annuitant. The beneficiary is the person(s) or
entity entitled to the death benefit at the death of a sole Owner prior to the
Annuity Date. In the case of the death of a Joint Owner, the surviving Joint
Owner will receive the death benefit. Under certain circumstances, the
beneficiary may be entitled to annuity benefit payments upon the death of an
Owner on or after the Annuity Date.
HOW MUCH CAN I INVEST AND HOW OFTEN?
During the Accumulation Phase, you may make additional payments. Total payments
under the Contract can exceed $5,000,000 only with the Company's prior approval.
The number and frequency of your payments are flexible, subject only to a
$50,000 minimum for your initial payment and a $50 minimum for any additional
payments. A minimum of $1,000 is always required to establish a Guarantee Period
Account.
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WHAT ARE MY INVESTMENT CHOICES?
You may choose among Sub-Accounts investing in the Underlying Funds, the
Guarantee Period Accounts, and the Fixed Account. The Funds are:
Allmerica Investment Trust
------------------------------------------------------
Equity Index Fund
Money Market Fund
FOR A MORE DETAILED DESCRIPTION OF THE UNDERLYING FUNDS, SEE INVESTMENT
OBJECTIVES AND POLICIES.
Each Underlying Fund operates pursuant to different investment objectives and
this range of investment options enables you to allocate your money among the
Underlying Funds to meet your particular investment needs.
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 (except in California, where assets are held in the
Company's General Account). Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, 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 may offer up to nine Guarantee Periods ranging from two to ten years
in duration. 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 any annuity option at any time other than the day following the
last day of the applicable Guarantee Period, a Market Value Adjustment will
apply that may increase or decrease the value. However, this adjustment will
never be applied against your principal. In addition, earnings in the GPA AFTER
application of the Market Value Adjustment will not be less than an effective
annual rate of 3%. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see GUARANTEE PERIOD ACCOUNTS.
THE GUARANTEE PERIOD ACCOUNTS ARE NOT AVAILABLE IN ALL STATES AND ARE NOT
OFFERED AFTER ANNUITIZATION.
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 a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. 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 Account, see
APPENDIX A, MORE INFORMATION ABOUT THE FIXED ACCOUNT.
CAN I MAKE TRANSFERS AMONG THE SUB-ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Funds, the Guarantee Period Accounts, and the Fixed
Account. On and after the Annuity Date, if you have elected a variable option,
you may transfer only among the Sub-Accounts. You will incur no current taxes on
transfers while your money remains in the Contract. See "D. Transfer Privilege"
under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.
The first 12 transfers in a Contract year are guaranteed to be free of a
transfer charge. For each subsequent transfer in a Contract year, the Company
does not currently charge but reserves the right to assess a processing charge
guaranteed never to exceed $25.
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If you authorize automatic periodic transfers (under an Asset Allocation Model
Reallocation program, Automatic Transfers program (Dollar Cost Averaging) or
Automatic Account Rebalancing program), the first automatic transfer or
rebalancing under a request counts as one transfer for purposes of the 12
transfers guaranteed to be free of a transfer charge in each Contract year. Each
subsequent automatic transfer or rebalancing under that request is without
charge and does not reduce the remaining number of transfers which may be made
free of charge in that Contract year.
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
Before the annuity payout phase begins, you may surrender your Contract or make
withdrawals at any time. A Market Value Adjustment will apply to withdrawals
from a Guarantee Period Account prior to the expiration of the Guarantee Period.
A 10% tax penalty may apply on all amounts deemed to be earnings if you are
under age 59 1/2.
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
cancelled. There may be a longer period in certain jurisdictions; see the Right
to Examine provision on the cover of your Contract.
If you cancel the Contract, you will receive the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account plus any fees or charges that may have been deducted. However, if
required in your state or if the Contract was issued as an Individual Retirement
Annuity (IRA), you will generally receive a refund of your gross payment(s). In
certain jurisdictions this refund may be the greater of (1) your gross
payment(s) or (2) the Accumulated Value adjusted for any Market Value
Adjustment, plus any fees or charges previously deducted. See "C. Right to
Cancel" -- under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may assign your ownership to someone else, except under qualified
plans.
- You may change the beneficiary, unless you have designated an irrevocable
beneficiary.
- You may change your allocation of payments.
- You may make transfers among the Sub-Accounts without any tax
consequences.
- You may cancel your Contract within ten days of delivery (or longer if
required by state law).
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DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS,
AND THE UNDERLYING FUNDS
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, Telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company, organized under the laws of
Massachusetts in 1844, is among the five oldest life insurance companies in
America. As of December 31, 1998, First Allmerica and its subsidiaries had over
$27 billion in combined assets and over $48 billion of life insurance in force.
Effective October 16, 1995, First Allmerica converted from a mutual life
insurance company known as State Mutual Life Assurance Company of America to a
stock life insurance company and adopted its present name. First Allmerica is a
wholly owned subsidiary of AFC. First Allmerica's principal office ("Principal
Office") is located at 440 Lincoln Street, Worcester, MA 01653, Telephone
508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate account called
Separate Account VA-K (the "Variable Account"). The Variable Account of
Allmerica Financial was authorized by vote of our Board of Directors on
November 1, 1990. The Variable Account of First Allmerica was authorized by vote
of our Board of Directors on November 1, 1990. Each Variable Account is
registered with the SEC as a unit investment trust under the 1940 Act. This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts or the Company by the SEC.
The Variable Account is a separate investment account of the Company. 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. Each Sub-Account is administered and accounted
for as part of our general business, 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. Obligations under
the Contracts are our obligations. Under Delaware and Massachusetts law, the
assets of the Variable Account may not be charged with any liabilities arising
out of any other business of the Company.
We reserve the right, subject to compliance with applicable law, to change the
names of the Variable Account and the Sub-Accounts. We also offer other variable
annuity contracts investing in the Variable Account which are not discussed in
this Prospectus. In addition the Variable Account may invest in other underlying
funds which are not available to the Contracts described in this Prospectus.
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ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust (the "Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. Two investment portfolios of the Trust are currently
available under the Contract, each issuing a series of shares: the Equity Index
Fund and the Money Market Fund. Shares of the Trust are not offered to the
general public but solely to such variable accounts.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as the
investment adviser of the Trust and 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."
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 THE
PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ CAREFULLY
BEFORE INVESTING. The Statements of Additional Information ("SAI") 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 the Contract will equal or exceed the aggregate amount of the purchase
payments made under the Contract.
EQUITY INDEX FUND -- The Equity Index Fund seeks to provide investment results
that correspond to the aggregate price and yield performance of a representative
selection of United States publicly traded common stocks. The Equity Index Fund
seeks to achieve its objective by attempting to replicate the aggregate price
and yield performance of the Standard & Poor's Composite Index of 500 Stocks.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity.
If there is a material change in the investment policy of a Sub-Account or the
Fund in which it invests, the Owner will be notified of the change. If the Owner
has Accumulated Value allocated to that Fund, he or she may have the Accumulated
Value reallocated without charge to another Fund or to the Fixed Account, where
available, on written request received by the Company 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 Owner's right to transfer.
INVESTMENT ADVISORY SERVICES
Each Underlying Fund pays a management fee to an investment manager or advisor
for managing and providing services to the Fund: however management fee waivers
and/or reimbursements may be in effect for certain or all of the Underlying
Funds. For specific information regarding the existence and effect of any
waivers/reimbursements see "Annual Underlying Fund Expenses" under SUMMARY OF
FEES AND EXPENSES section. The prospectuses of the Underlying Funds also contain
information regarding fees for advisory services and should be read in
conjunction with the Prospectus.
INVESTMENT ADVISORY SERVICES TO THE TRUST. The overall responsibility for the
supervision of the affairs of the Trust rests with the trustees. The Trust has
entered into an agreement ("Management Agreement") with Allmerica Financial
Investment Management Services, Inc. ("AFIMS"), an indirect wholly owned
subsidiary of First Allmerica, to handle the day-to-day affairs of the Trust.
AFIMS, subject to review by the trustees, is responsible for the general
management of the Funds of the Trust. AFIMS also performs certain administrative
and management services for the Trust, furnishes to the Trust all necessary
office space, facilities and equipment, and pays the compensation, if any, of
officers and trustees affiliated with AFIMS.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it.
These include fees and expenses associated with the
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registration and qualification of the Trust's shares under the Securities Act of
1933 ("the 1933 Act"), other fees payable to the SEC, 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 AFIMS, expenses for proxies, prospectuses,
reports to shareholders and other expenses.
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund of the Trust as follows:
<TABLE>
<S> <C> <C>
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
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DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE
A. PAYMENTS
The latest Issue Date is age 90 of the oldest Owner, or, if the Owner is not a
natural person, the oldest Annuitant. The Company will issue a Contract when its
underwriting requirements are met. These requirements include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office and may include the proper completion of an application; however, where
permitted by law, the Company may issue a Contract without completion of an
application. If all issue requirements are not completed within five business
days of the Company's receipt of the initial payment, the payment will be
returned immediately unless the applicant authorizes the Company to retain it
pending completion of all issue requirements.
Payments may be made to the Contract at any time prior to the Annuity Date, or
prior to the death of an Owner, subject to certain minimums:
- Currently, the initial payment must be at least $50,000.
- Each subsequent payment must be at least $50.
- 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 the Money Market Fund of the
Trust.
Payments are to be made payable to the Company. The Company may reduce a payment
by any applicable premium tax before applying it to the Contract. The initial
net payment is credited to the Contract and allocated among the requested
accounts as of the date that all issue requirements are properly met. The
allocation instructions for the initial net payment will serve as the allocation
instructions for all future payments. You can change the allocations
instructions for future payments by notifying the Company.
You also have the option of specifying how a specific payment should be
allocated. This will not change the allocation instructions for any subsequent
payment.
For a discussion of future payments to an Automatic Transfer Program (Dollar
Cost Averaging), please see "Automatic Transfers (Dollar Cost Averaging)" below.
In order for the Owner to be able to initiate transactions over the telephone, 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 we
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. Such procedures may include, among others, requiring some form of
personal identification prior to acting upon instructions received by telephone.
All telephone instructions are tape-recorded.
B. COMPUTATION OF VALUES
The Owner may allocate payments among the Sub-Accounts, Guarantee Period
Accounts, and the Fixed Account. Allocations to the 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.
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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 together the values of each Sub-Account, and
(3) adding the amount of the accumulations in the Fixed Account and
Guarantee Period Accounts, if any.
THE ACCUMULATION UNIT. 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 payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date. 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 arbitrarily set at $1.00
on the first Valuation Date for each Sub-Account.
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 (which may be positive or
negative) from dividing (1) by (2) and subtracting (3) and (4) where:
(1) 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;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 0.65% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% 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 an Accumulation Unit calculation using a hypothetical
example see the SAI.
C. RIGHT TO CANCEL
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by law) and receive a refund. In order to
cancel the Contract, the Owner must mail or deliver it to the Company's
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for cancellation to be effective.
In most states, the Company will pay the Owner the Contract's Accumulated Value
adjusted for any Market Value Adjustment for amounts allocated to a Guarantee
Period Account, plus any amounts deducted for taxes, charges or fees. However,
if the Contract was purchased as an IRA or issued in a state that requires a
full refund of the initial payment(s), the Company will provide a refund equal
to your gross payment(s). In some states, the refund may equal the greater of
(a) your gross payment(s) or (b) the Accumulated Value adjusted for any Market
Value Adjustment, plus any amounts deducted for taxes, charges or fees. At the
time the
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Contract is issued, the Right to Examine provision on the cover of the Contract
will specifically indicate what the refund will be and the time period allowed
to exercise the right to cancel.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
D. TRANSFER PRIVILEGE
Prior to the Annuity Date, the Owner may transfer amounts among accounts at any
time upon written or telephone request to the Company. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored. Transfer values will be based on the
Accumulated Value next computed after receipt of the transfer request.
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 the Money Market Fund. Transfers from a Guarantee
Period Account prior to the expiration of the Guarantee Period will be subject
to a Market Value Adjustment.
Currently, the Company does not charge for transfers. The first 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. The first automatic transfer or rebalancing under an
Automatic Transfers (Dollar Cost Averaging) program or Automatic Account
Rebalancing program counts as one transfer for purposes of the 12 transfers
guaranteed to be free of a transfer charge in each Contract year. Each
subsequent automatic transfer or rebalancing under that request is without
charge and does not reduce the remaining number of transfers which may be made
free of charge in that Contract year.
The Company also reserves the right to restrict transfer privileges when
exercised by a market timing firm or any other third party authorized to
initiate allocations, transfers or exchanges on behalf of multiple Contract
Owners. The Company may, among other things, not accept:
- the transfer or exchange instructions of any agent acting under a power of
attorney on behalf of more than one Owner, or
- the transfer or exchange instructions of individual Owners who have
executed pre-authorized transfer or exchange forms which are submitted by
market timing firms or other third parties on behalf of more than one Owner
at the same time.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING). You may elect automatic transfers
of a predetermined dollar amount on a periodic basis from the Fixed Account or
the Sub-Accounts investing in the Money Market Fund ("source accounts"). You may
elect automatic transfers to one or more Sub-Accounts, subject to the following:
- the predetermined dollar amount may not be less than $100;
- the periodic basis may be monthly, quarterly, semi-annually or annually;
- automatic transfers may not be made into the selected source account,
Fixed Account, or the Guarantee Period Accounts; and
- if an automatic transfer would reduce the balance in the source account to
less than $100, the entire balance will be transferred proportionately to
the chosen Sub-Accounts.
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<PAGE>
Automatic transfers from a source account will continue until the earlier of:
- the amount in the source account on a transfer date is zero; or
- the Owner's request to terminate the option is received by the Company.
If additional amounts are allocated to a source account before its balance has
fallen to zero, those additional amounts will also be automatically transferred.
The original automatic transfer allocations will apply to all amounts in that
source account unless you provide new allocation instructions. New allocation
instructions will apply to the entire balance in the source account. If
additional amounts are allocated to a source account after its balance has
fallen to zero, automatic transfers will not begin again unless you specifically
instruct the Company to do so.
To the extent permitted by law, the Company reserves the right, from time to
time, to credit an enhanced interest rate to an initial and/or subsequent
payment made to the Fixed Account, which is then used as the source account from
which to process automatic transfers. For more information see APPENDIX A, MORE
INFORMATION ABOUT THE FIXED ACCOUNT.
AUTOMATIC ACCOUNT REBALANCING. The Owner may request automatic rebalancing of
Sub-Account allocations on a monthly, quarterly, semi-annual or annual basis in
accordance with his/her specified percentage allocations. As frequently as
elected by the Owner, the Company will review the percentage allocations in the
Underlying Funds and, if necessary, transfer amounts to ensure conformity with
the designated percentage allocation mix. If the amount necessary to
re-establish the mix on any scheduled date is less than $100, no transfer will
be made.
Automatic Account Rebalancing will continue until (1) the Owner's request to
terminate or change the option is received by the Company or (2) the end date
designated by the Owner when the option was elected. If a subsequent payment is
allocated in a manner different from the percentage allocation mix in effect on
the date the payment is received, on the next scheduled rebalancing date the
payment will be reallocated in accordance with the existing mix.
Currently, Dollar Cost Averaging and Automatic Account Rebalancing may not be in
effect simultaneously. Either option may be elected at no additional charge when
the Contract is purchased or at a later date. The Company reserves the right to
limit the number of Sub-Accounts that may be utilized for automatic transfers
and rebalancing, and to discontinue either option upon advance written notice.
E. SURRENDER AND WITHDRAWALS
Before the Annuity Date, an Owner may surrender the Contract for its Surrender
Value or withdraw a portion of its Accumulated Value. In the case of surrender,
the Owner must send the Contract and a signed written request for surrender,
satisfactory to the Company, to the Principal Office. The Surrender Value will
be calculated based on the Contract's Accumulated Value as of the Valuation
Date.
In the case of a withdrawal, the Owner must submit to the Principal Office a
signed, written request indicating the desired dollar amount and the accounts
from which such amount is to be withdrawn. A withdrawal from a Sub-Account will
result in cancellation of a number of units equivalent in value to the amount
withdrawn. Each withdrawal must be a minimum of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $10,000.
A Contract fee may apply when a Contract is surrendered. See CHARGES AND
DEDUCTIONS. In addition, amounts withdrawn 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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Any distribution is normally payable within seven days following the Company's
receipt of the surrender or withdrawal request. The Company reserves the right
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
Company reserves the right to defer surrenders and withdrawals of amounts in
each Sub-Account in any period during which:
- 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,
- the SEC has by order permitted such suspension, or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
For important tax consequences, which may result from surrender or withdrawals,
see FEDERAL TAX CONSIDERATIONS.
For information about withdrawals after the Annuity Date, see ANNUITIZATION --
THE PAYOUT PHASE, F. Withdrawals After the Annuity Date.
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a periodic basis (monthly, bi-monthly, quarterly, semi-annually
or annually). Systematic withdrawals from Guarantee Period Accounts are not
available. The Owner may request:
- the withdrawal of a SPECIFIC DOLLAR AMOUNT and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed
Account; or
- the withdrawal of a SPECIFIC PERCENTAGE of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of
this amount which should be taken from each account.
The first withdrawal will take place on the latest of 15 days after Issue Date,
the date the written request is received at the Principal Office, or on a date
specified by the Owner.
The minimum amount of each automatic withdrawal is $100. If a withdrawal would
cause the remaining Accumulated Value to be less than $10,000, systematic
withdrawals may be discontinued. Systematic withdrawals will cease automatically
on the Annuity Date. The Owner may change or terminate systematic withdrawals
only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. (For Qualified Contracts and Contracts issued
under Section 457 Deferred Compensation Plans only). Prior to the Annuity Date,
an Owner may elect to make a series of systematic withdrawals from the Contract
according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office. Where the
Owner is a trust or other nonnatural person, the Owner may elect the LED option
based on the Annuitant's life expectancy.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn based on the Owner's life expectancy (or the
joint life expectancy of the Owner and a beneficiary.) The numerator of the
fraction is 1 (one). The denominator of the fraction will be either:
- the remaining life expectancy of the Owner (or Owner and beneficiary), as
determined annually by the Company; or
- the prior year's life expectancy, minus one.
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The resulting fraction, expressed as a percentage, is then applied to the
Accumulated Value at the beginning of the year to determine the amount to be
distributed during the year. The Owner may choose to have the applicable life
expectancy redetermined each year or use the prior year's life expectancy, minus
one. Under the Company's LED option, the amount withdrawn from the Contract
changes each year.
The Owner may elect periodic LED distributions on a monthly, bi-monthly,
quarterly, semi-annual, or annual basis. The Owner may terminate the LED option
at any time. The LED option will terminate automatically on the maximum Annuity
Date permitted under the Contract, at which time an annuity payout option must
be selected.
The LED option may not produce annual distributions that meet the definition of
"substantially equal periodic payments" as defined under Code Section 72(t). The
withdrawals may be treated by the Internal Revenue Service (IRS) as premature
distributions from the Contract and may be subject to a 10% federal tax penalty.
Owners seeking distributions over their life under this definition should
consult their tax advisor. For more information, see "C. Taxation of the
Contract in General" under FEDERAL TAX CONSIDERATIONS.
F. DEATH BENEFIT
A death benefit is payable if the Owner or the first of Joint Owners dies prior
to the Annuity Date. If the Owner is a natural person, no death benefit is
payable at the death of any Annuitant. If the Owner is not a natural person, a
death benefit will be paid upon the death of any Annuitant. A spousal
beneficiary may elect to continue the Contract rather than receive the death
benefit as provided in "G. The Spouse of the Owner as Beneficiary."
STANDARD DEATH BENEFIT. Unless an enhanced death benefit is elected at issue,
the standard death benefit will be paid. The standard death benefit is equal to
the greater of (a) the Contract's Accumulated Value on the Valuation Date that
the Company receives proof of death, increased by any positive Market Value
Adjustment or (b) gross payments prior to the date of death, proportionately
reduced to reflect withdrawals.
For each withdrawal under (b), the proportionate reduction is calculated by
multiplying the standard death benefit immediately prior to the withdrawal by
the following fraction:
Amount of the withdrawal
------------------------------------------------
Accumulated Value immediately prior to the withdrawal
OPTIONAL ENHANCED DEATH BENEFIT RIDER. When applying for the Contract, an Owner
may elect the optional 5% Enhanced Death Benefit With Annual Step-Up Rider. A
separate charge for this Rider is made against the Contract's Accumulated Value
on the last day of each Contract month for the coverage provided during that
month and, if applicable, on the date the Rider is terminated. The charge is
made through a pro-rata reduction (based on relative values) of Accumulation
Units in the Sub-Accounts and dollar amounts in the Fixed and Guarantee Period
Accounts. For specific charges and more detail, see "C. Optional Rider Charge"
under CHARGES AND DEDUCTIONS.
The 5% Enhanced Death Benefit With Annual Step-Up Rider provides a death benefit
guarantee if death of an Owner (or an Annuitant if the Owner is not a natural
person) occurs before the Annuity Date. The calculation of the death benefit
depends upon whether death occurs before or after the 90th birthday:
I. Death BEFORE 90th Birthday. If an Owner (or an Annuitant if the Owner is a
not a natural person) dies before the Annuity Date and before his/her 90th
birthday, the death benefit is equal to the greatest of:
(a) the Accumulated Value on the Valuation Date that the Company received
proof of death, increased by any positive Market Value Adjustment;
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<PAGE>
(b) gross payments, accumulated daily at an effective annual yield of 5%
from the date each payment is applied until the date of death,
proportionately reduced to reflect withdrawals; and
(c) the highest Accumulated Value on any Contract anniversary date prior to
the date of death, as determined after being increased for any positive
Market Value Adjustment and subsequent payments and proportionately
reduced for subsequent withdrawals.
II. Death ON OR AFTER 90th Birthday. If an Owner (or the Annuitant if the Owner
is not a natural person) dies before the Annuity Date but on or after his/her
90th birthday, the death benefit is equal to the greater of:
(a) the Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under Section I above, that would have
been payable on the Contract anniversary prior to the deceased's 90th
birthday, increased for subsequent payments and proportionately reduced
for subsequent withdrawals.
Proportionate reductions are calculated in the same manner as described above
under "Standard Death Benefit."
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum upon receipt of due proof
of death at the Principal Office, unless the Owner has elected to apply the
proceeds to a life annuity not extending beyond the beneficiary's life
expectancy. Instead of payment in one sum, the beneficiary may, by written
request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive distributions over the life of the beneficiary or for a period
certain not extending beyond the beneficiary's life expectancy, with
annuity benefit payments beginning within one year from the date of
death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Money Market
Sub-Account. The excess, if any, of the death benefit over the Accumulated Value
also will be transferred to the Money Market Sub-Account. The beneficiary may,
by written request, effect transfers and withdrawals during the deferral period
and prior to annuitization under (2), but may not make additional payments. The
death benefit will reflect any earnings or losses experienced during the
deferral period. If there are multiple beneficiaries, the consent of all is
required.
G. THE SPOUSE OF THE OWNER AS BENEFICIARY
If the sole beneficiary is the deceased Owner's spouse, he or she may, by
written request, continue the Contract in lieu of receiving payment of the death
benefit. The spouse will then become the Owner and Annuitant subject to the
following:
(1) any value in the Guarantee Period Accounts will be transferred to the
Money Market Sub-Account; and
(2) the excess, if any, of the death benefit over the Contract's Accumulated
Value also will be added to the Money Market Sub-Account.
The new Owner may also make additional payments. All other rights and benefits
provided in the Contract will continue, except that any subsequent spouse of the
new Owner, if named as beneficiary, will not be entitled to continue the
Contract when the new Owner dies.
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H. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (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 Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
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ANNUITIZATION -- THE PAYOUT PHASE
Subject to certain restrictions discussed below, at annuitization the Owner has
the right:
- to select the annuity payout option under which annuity benefit payments
are to be made;
- to determine whether those payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. If a variable
annuity payout option is selected, the Owner must choose an Annuity Benefit
Payment Change Frequency ("Change Frequency") and the date the first Change
Frequency will occur;
- to select one of the available Assumed Investment Returns ("AIR") for a
variable option (see "D. Variable Annuity Benefit Payments" below for
details); and
- to elect to have the Death Benefit applied under any annuity payout option
not extending beyond the beneficiary's life expectancy. The beneficiary may
not change such an election.
A. ELECTING THE ANNUITY DATE
Generally, annuity benefit payments under the Contract will begin on the Annuity
Date. The Annuity Date:
- may not be earlier than the first Contract Anniversary; and
- must occur on the first day of any month before the Owner's 99th birthday.
If the Owner does not select an Annuity Date, the Annuity Date will be the later
of (a) the Owner's age 85 or (b) one year after the Issue Date.
If there are Joint Owners, the age of the younger will determine the latest
possible Annuity Date. The Owner may elect to change the Annuity Date by sending
a request to the Principal Office at least one month before the earlier of the
new Annuity Date or the currently scheduled date.
If the Annuity Date occurs when the Owner is at an advanced age, it is possible
that the Contract will not be considered an annuity for federal tax purposes. In
addition, the Internal Revenue Code ("the Code") and/or the terms of qualified
plans may impose limitations on the age at which annuity benefit payments may
commence and the type of annuity payout option that may be elected. The Owner
should carefully review the Annuity Date and the annuity payout options with
his/her tax adviser. See FEDERAL TAX CONSIDERATIONS for further information.
B. CHOOSING THE ANNUITY PAYOUT OPTION
Regardless of how payments were allocated during the accumulation phase, the
Owner may choose a variable annuity payout option, a fixed annuity payout option
or a combination fixed and variable annuity payout option. Currently, all of the
variable annuity payout options described below are available and may be funded
through all of the variable Sub-Accounts. In addition, each of the variable
annuity payout options is also available on a fixed basis. The Company may offer
other annuity payout options.
The Owner may change the annuity payout option up to one month before the
Annuity Date. If the Owner fails to choose an annuity payout option, monthly
benefit payments will be made under a variable Life with Cash Back annuity
payout option.
The annuity payout option selected must result in an initial payment of at least
$100 (a lower amount may be required in certain jurisdictions.) The Company
reserves the right to increase this minimum amount. If the
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annuity payout option selected does not produce an initial payment which meets
this minimum, a single payment may be made.
FIXED ANNUITY PAYOUT OPTIONS. If the Owner selects a fixed annuity payout
option, each monthly annuity benefit payment will be equal to the first (unless
a withdrawal is made or as otherwise described under certain reduced survivor
annuity benefits.) Any portion of the Contract's Accumulated Value converted to
a fixed annuity will be held in the Company's General Account. The Contract
provides guaranteed fixed annuity option rates that determine the dollar amount
of the first payment under each form of fixed annuity for each $1,000 of applied
value. These rates are based on the Annuity 2000 Mortality Table and a 3% AIR.
The Company may offer annuity rates more favorable than those contained in the
Contract. Any such rates will be applied uniformly to all Owners of the same
class. For more specific information about fixed annuity payout options, see the
Contract.
VARIABLE ANNUITY PAYOUT OPTIONS. If the Owner selects a variable annuity payout
option, he/she will receive monthly payments equal to the value of the fixed
number of Annuity Units in the chosen Sub-Account(s). The first variable annuity
benefit payment will be based on the current annuity option rates made available
by the Company at the time the variable annuity payout option is selected.
Annuity option rates determine the dollar amount of the first payment for each
$1,000 of applied value. The annuity option rates are based on the Annuity 2000
Mortality Table and a 3% AIR.
Since the value of an Annuity Unit in a Sub-Account reflects the investment
performance of the Sub-Account, the amount of each monthly annuity benefit
payment will usually vary. However, under this Contract, if the Owner elects a
variable payout option, he or she must also select a monthly, quarterly,
semi-annual or annual Change Frequency. The Change Frequency is the frequency
that changes due to the Sub-Account's investment performance will be reflected
in the dollar value of a variable annuity benefit payment. As such, the Change
Frequency chosen will determine how frequently monthly variable annuity payments
will vary. For example, if a monthly Change Frequency is in effect, payments may
vary on a monthly basis. If a quarterly Change Frequency is selected, the amount
of each monthly payment may change every three months and will be level within
each three month cycle.
At the time the Change Frequency is elected, the Owner must also select the date
the first change is to occur. This date may not be later than the length of the
Change Frequency elected. For example, if a semi-annual Change Frequency is
elected, the date of the first change may not be later than six months after the
Annuity Date. If a quarterly Change Frequency is elected, the date of the first
change may not be later than three months after the Annuity Date.
C. DESCRIPTION OF ANNUITY PAYOUT OPTIONS
The Company currently provides the following annuity payout options:
LIFE ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Payments cease with the last annuity benefit payment due prior to the
Annuitant's death.
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. Upon the first death, payments will
continue for the remaining lifetime of the survivor at a previously elected
level of 100%, two-thirds or one-half of the total number of Annuity Units.
LIFE WITH PERIOD CERTAIN ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments guaranteed for a specified number
of years and continuing thereafter during the Annuitant's lifetime. If the
Annuitant dies before all guaranteed payments have
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been made, the remaining payments continue to the Owner or the Beneficiary
(whichever is applicable).
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments guaranteed for a
specified number of years and continuing during the Annuitant's and Joint
Annuitant's joint lifetimes. Upon the first death, payments continue for
the survivor's remaining lifetime at the previously elected level of 100%,
two-thirds or one-half of the Annuity Units. If the surviving Annuitant
dies before all guaranteed payments have been made, the remaining payments
continue to the Owner or the Beneficiary (whichever is applicable).
LIFE WITH CASH BACK ANNUITY PAYOUT OPTION
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Thereafter, any excess of the originally applied Annuity Value, over the
total amount of annuity benefit payments made and withdrawals taken, will
be paid to the Owner or the Beneficiary (whichever is applicable).
- JOINT AND SURVIVOR ANNUITIES -- Monthly payments during the Annuitant's
and Joint Annuitant's joint lifetimes. At the first death, payments
continue for the survivor's remaining lifetime at the previously elected
level of 100%, two-thirds or one-half of the Annuity Units. Thereafter, any
excess of the original applied Annuity Value, over the total amount of
annuity benefit payments made and withdrawals taken, will be paid to the
Owner or the Beneficiary (whichever is applicable).
PERIOD CERTAIN ANNUITY PAYOUT OPTION
Monthly annuity benefit payments for a chosen number of years ranging from five
to thirty are paid. If the Annuitant dies before the end of the period,
remaining payments will continue. 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.
D. VARIABLE ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account on its inception date
was set at $1.00. The value of an Annuity Unit of a Sub-Account on any Valuation
Date thereafter is equal to the value of the Annuity Unit on the immediately
preceding Valuation Date multiplied by the product of:
(1) a discount factor equivalent to the AIR and
(2) the Net Investment Factor of the Sub-Account funding the annuity benefit
payments for the applicable Valuation Period.
Annuity benefit payments will increase from one payment date to the next if the
annualized net rate of return during that period is greater than the AIR and
will decrease if the annualized net rate of return is less than the AIR. Where
permitted by law, the Owner may select an AIR of 3%, 5%, or 7%. A higher AIR
will result in a higher initial payment. However, subsequent payments will
increase more slowly during periods when actual investment performance exceeds
the AIR and will decrease more rapidly during periods when investment
performance is less than the AIR.
DETERMINATION OF THE FIRST ANNUITY BENEFIT PAYMENT. The amount of the first
periodic variable annuity benefit payment depends on the:
- annuity payout option chosen;
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- length of the annuity payout option elected;
- age of the Annuitant;
- gender of the Annuitant (if applicable, see "H. NORRIS Decision");
- value of the amount applied under the annuity payout option;
- applicable annuity purchase rates based on the Annuity 2000 Mortality
Table; and
- AIR selected.
The dollar amount of the first periodic annuity benefit payment is determined by
multiplying:
(1) the Accumulated Value applied under that option after application of any
Market Value Adjustment and less premium tax, if any, (or the amount of
the death benefit, if applicable) divided by $1,000, by
(2) the applicable amount of the first monthly payment per $1,000 of value.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is then divided by the value of an Annuity Unit
of the selected Sub-Account(s) to determine the number of Annuity Units
represented by the first payment. The number of Annuity Units remains fixed
under all annuity payout options (except for the survivor annuity benefit
payment under the joint and two-thirds or joint and one-half option) unless the
Owner transfers among Sub-Accounts, makes a withdrawal, or units are split.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. For each
subsequent payment, the dollar amount of the variable annuity benefit payment is
determined by multiplying this fixed number of Annuity Units by the value of an
Annuity Unit on the applicable Valuation Date. The dollar amount of each
periodic variable annuity benefit payment after the first will vary with
subsequent variations in the value of the Annuity Unit of the selected
Sub-Account(s).
For an illustration of the calculation of a variable annuity benefit payment
using a hypothetical example, see "Annuity Benefit Payments" in the SAI.
PAYMENT OF ANNUITY BENEFIT PAYMENTS. The Owner will receive the annuity benefit
payments unless he/ she requests in writing that payments be made to another
person, persons, or entity. If the Owner (or, if there are Joint Owners, the
surviving Joint Owner) dies on or after the Annuity Date, the beneficiary will
become the Owner of the Contract. Any remaining annuity benefit payments will
continue to the beneficiary in accordance with the terms of the annuity benefit
payment option selected. If there are Joint Owners on or after the Annuity Date,
upon the first Owner's death, any remaining annuity benefit payments will
continue to the surviving Joint Owner in accordance with the terms of the
annuity benefit payment option selected.
If an Annuitant dies on or after the Annuity Date but before all guaranteed
annuity benefit payments have been made, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated. Unless otherwise
indicated by the Owner, the present value of any remaining guaranteed annuity
benefit payments may be paid in a single sum to the Owner. For discussion of
present value calculation, see "Calculation of Present Value" below.
E. TRANSFERS OF ANNUITY UNITS
After the Annuity Date and prior to the death of the Annuitant, the Owner may
transfer among the available Sub-Accounts upon written or telephone request to
the Company. As discussed in "A. Payments," a properly
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completed authorization form must be on file before telephone requests will be
honored. A designated number of Annuity Units equal to the dollar amount of the
transfer requested will be exchanged for an equivalent dollar amount of Annuity
Units of another Sub-Account. Transfer values will be based on the Annuity Value
next computed after receipt of the transfer request.
Currently, the Company does not charge for transfers. The first 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.
Automatic transfers (Dollar Cost Averaging) are available during the
annuitization phase subject to the same rules described in "D. Transfer
Privilege" except that the Fixed Account is not available as a source account.
F. WITHDRAWALS AFTER THE ANNUITY DATE
WITHDRAWALS AFTER THE ANNUITY DATE FROM QUALIFIED AND NON-QUALIFIED CONTRACTS
MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE CONSULT
YOUR TAX ADVISOR AND SEE FEDERAL TAX CONSIDERATIONS, "C. TAXATION OF THE
CONTRACT IN GENERAL," "WITHDRAWALS AFTER ANNUITIZATION."
After the Annuity Date and prior to the death of the Annuitant, the Owner may
take withdrawals from the Contract. The Owner must submit to the Principal
Office a signed, written request indicating the desired dollar amount of the
withdrawal. The minimum amount of a withdrawal is $1,000. If the amount
requested is greater than the maximum amount that may be withdrawn at that time,
the Company will allow the withdrawal only up to the maximum amount.
The type of withdrawal and the number of withdrawals that may be made each
calendar year depend upon whether the Owner annuitizes under an annuity payout
option with payments based on the life of one or more Annuitants with no
guaranteed payments (a "Life" annuity payout option), under a life annuity
payout option that in part provides for a guaranteed number of payments (a "Life
With Period Certain" or "Life With Cash Back" annuity payout option), or an
annuity payout option based on a guaranteed number of payments (a "Period
Certain" annuity payout option).
WITHDRAWALS UNDER LIFE ANNUITY PAYOUT OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied
by ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity benefit payments.
WITHDRAWALS UNDER LIFE WITH PERIOD CERTAIN OR LIFE WITH CASH BACK ANNUITY PAYOUT
OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity benefit payment multiplied
by ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity benefit payments.
The Owner may make one Present Value Withdrawal in each calendar year, if there
are remaining GUARANTEED annuity benefit payments. The amount of each Present
Value Withdrawal represents a percentage of the present value of the remaining
guaranteed annuity benefit payments. Each year a Present Value Withdrawal is
taken, the Company records the percentage of the present value of the then
remaining guaranteed annuity benefit payments that was withdrawn. The total
percentage withdrawn over the life of the Contract cannot exceed 75%. This means
that each Present Value Withdrawal is limited by the remaining available
percentage. (For example, assume that in year three the Owner withdraws 15% of
the then current present value of the remaining guaranteed annuity benefit
payments. In year seven, the Owner withdraws 20% of the then current present
value of the remaining guaranteed annuity benefit payments. Through year seven
the total percentage
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withdrawn is 35%. After year seven, the Owner may make Present Value
Withdrawal(s) of up to 40% (75% - 35%) of the present value of any remaining
guaranteed annuity benefit payments).
Under a Life with Period Certain annuity payout option or Life with Cash Back
annuity payout option, if the Annuitant is still living after the guaranteed
annuity benefit payments have been made, the number of Annuity Units or dollar
amount applied to future annuity benefit payments will be restored as if no
Present Value Withdrawal(s) had taken place. See "Calculation of Proportionate
Reduction -- Present Value Withdrawals," below.
WITHDRAWALS UNDER PERIOD CERTAIN ANNUITY PAYOUT OPTIONS
The Owner may make multiple Present Value Withdrawals in each calendar year, up
to 100% of the present value of the guaranteed annuity benefit payments.
Withdrawal of 100% of the present value of the guaranteed annuity benefit
payments will result in termination of the Contract.
The amount of each Payment Withdrawal or Present Value Withdrawal represents a
portion of the present value of the remaining annuity benefit payments or
remaining guaranteed annuity benefit payments, respectively, and proportionately
reduces the number of Annuity Units (under a variable annuity payout option) or
dollar amount (under a fixed annuity payout option) applied to future annuity
benefit payments. Because each variable annuity benefit payment is determined by
multiplying the number of Annuity Units by the value of an Annuity Unit, the
reduction in the number of Annuity Units will result in lower future variable
annuity benefit payments. See "Calculation of Proportionate Reduction," below.
The present value is calculated with a discount rate that will include an
additional charge if a withdrawal is taken within 5 years of the Issue Date. See
"Calculation of Present Value," below.
CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately
reduces the number of Annuity Units applied to each future variable annuity
benefit payment or the dollar amount applied to each future fixed annuity
benefit payment. Each Present Value Withdrawal proportionately reduces the
number of Annuity Units applied to each future GUARANTEED variable annuity
benefit payment or the dollar amount applied to each future GUARANTEED fixed
annuity benefit payment. Because each variable annuity benefit payment is
determined by multiplying the number of Annuity Units by the value of an Annuity
Unit, the reduction in the number of Annuity Units will result in lower future
variable annuity benefit payments.
PAYMENT WITHDRAWALS. Payment Withdrawals are available under Life, Life with
Period Certain, or Life with Cash Back annuity payout options. The Owner may
make one Payment Withdrawal in each calendar year.
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable annuity benefit payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
----------------------------------------------
Present value of all remaining variable annuity
benefit payments immediately prior to the withdrawal
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower future variable annuity benefit
payments.
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment by
a similar fraction, which is based on the amount of the fixed withdrawal and
present value of remaining fixed annuity benefit payments.
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If a withdrawal is taken within 5 years of the Issue Date, the discount rate
used to calculate the present value will include an additional charge. See
"Calculation of Present Value," below.
PRESENT VALUE WITHDRAWALS. Present Value Withdrawals are available under Life
with Period Certain or Life with Cash Back annuity payout options (the Owner may
make one Present Value Withdrawal in each calendar year, if there are remaining
guaranteed annuity benefit payments) and under Period Certain annuity payout
options (the Owner may make multiple Present Value Withdrawals in each calendar
year).
Under a variable annuity payout option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each future
variable guaranteed annuity benefit payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
----------------------------------------------
Present value of all remaining variable annuity
benefit payments immediately prior to the withdrawal
Under a fixed annuity payout option, the proportionate reduction is calculated
by multiplying the dollar amount of each future fixed annuity benefit payment by
a similar fraction, which is based on the amount of the fixed withdrawal and
present value of remaining guaranteed fixed annuity benefit payments.
Because each variable annuity benefit payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in the
number of Annuity Units will result in lower variable annuity benefit payments
with respect to the guaranteed payments. Under a fixed annuity payout option,
the proportionate reduction will result in lower fixed annuity benefit payments
with respect to the guaranteed payments. However, under a Life with Period
Certain annuity payout option or Life with Cash Back annuity payout option, if
the Annuitant is still living after the guaranteed number of annuity benefit
payments has been made, the number of Annuity Units or dollar amount of future
annuity benefit payments will be restored as if no Present Value Withdrawal(s)
had taken place.
If a withdrawal is taken within 5 years of the Issue Date, the discount rate
used to calculate the present value will include an additional charge. See
"Calculation of Present Value," below.
CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of
future annuity benefit payments is calculated based on an assumed mortality
table and a discount rate. The mortality table that is used will be equal to the
mortality table used at the time of annuitization to determine the annuity
benefit payments (currently the Annuity 2000 Mortality Table with male, female,
or unisex rates, as appropriate). The discount rate is the AIR (for a variable
annuity payout option) or the interest rate (for a fixed annuity payout option)
that was used at the time of annuitization to determine the annuity benefit
payments.
For each Payment Withdrawal, the number of years of annuity benefit payments
being valued depends upon the life expectancy of the Annuitant at the time of
the withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity benefit payments (currently the Annuity 2000 Mortality
Table).
Carefully consider the following before making a withdrawal (especially if you
are making the withdrawal under a Life with Period Certain or Life with Cash
Back annuity payout option):
- For a Payment Withdrawal, the present value calculation (including any
applicable adjustments) affects the proportionate reduction of the
remaining number of Annuity Units (under a variable annuity payout option)
or dollar amount (under a fixed annuity payout option), applied to each
future annuity benefit payment, as explained in "Calculation of
Proportionate Reduction -- Payment Withdrawals," above. There will be a
proportionate reduction in the number of Annuity Units or the dollar amount
applied to
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each future annuity benefit payment. This will result in lower future
annuity benefit payments, all other things being equal.
- For a Present Value Withdrawal, the discount factor is used in determining
the maximum amount that can be withdrawn under the present value
calculation. In addition, there will be a proportionate reduction in the
number of Annuity Units or the dollar amount applied to each future
guaranteed annuity benefit payment. This will result in lower future
annuity benefit payments with respect to the guaranteed payments, all other
things being equal. See "Calculation of Proportionate Reduction -- Present
Value Withdrawals," above.
For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see
APPENDIX D -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS.
DEFERRAL OF WITHDRAWALS. A withdrawal is normally payable within seven days
following the Company's receipt of the withdrawal request. However, the Company
reserves the right to defer withdrawals of amounts in each Sub-Account in any
period during which:
- 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;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a separate account is not
reasonably practicable.
The Company reserves the right to defer withdrawals of amounts allocated to the
Company's General Account for a period not to exceed six months.
G. REVERSAL OF ANNUITIZATION
The Owner may reverse the decision to annuitize by written request to the
Company within 90 days of the Annuity Date. Upon receipt of such request, the
Company will return the Contract to the Accumulation Phase, subject to the
following:
(1) The value applied under a fixed annuity payout option at the time of
annuitization will be treated as if it had been invested in the Fixed
Account of the Contract on that same date.
(2) The Sub-Account allocations that were in effect at the time of
annuitization will first be used for calculating the reversal. Any
transfers between variable Sub-Accounts during the Annuity Payout phase
will then be treated as transfers during the Accumulation Phase (As a
result, the Contract's Accumulated Value after the reversal will reflect
the same Sub-Account allocations that were in effect immediately prior to
the reversal).
(3) Any annuity benefit payments paid and any withdrawals taken during the
Annuity Payout phase will be treated as a withdrawal of the Surrender
Value in the Accumulation Phase, as of the date of the payment or
withdrawal. There may be adverse tax consequences resulting from these
withdrawals. See FEDERAL TAX CONSIDERATIONS, "C. Taxation of the Contract
in General."
If the Company learns of the Owner's decision to reverse annuitization after the
maximum Annuity Date permitted under the Contract, the Company will contact the
Owner. The Owner must then immediately select an annuity payout option (either
the original annuity payout option or a different annuity payout option). If the
Owner does not select an annuity payout option, payments will begin under a
variable Life with Cash Back annuity payout option.
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H. 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 unisex rates.
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CHARGES AND DEDUCTIONS
Deductions under the Contract 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 prospectuses and SAIs of the Underlying
Funds.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The mortality and expense risk charge is assessed daily at an
annual rate of 0.65% of each Sub-Account's assets. The charge is imposed during
both the accumulation phase and the annuity payout phase. 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
payout option selected), no matter how long the Annuitant lives and no matter
how long all Annuitants as a class live. The mortality charge is deducted during
the annuity payout 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 Contract 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.
This charge may not be increased. Since mortality and expense risks involve
future contingencies that 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.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily Administrative Expense Charge at an annual rate of 0.15% of the average
daily net assets of the Sub-Account. The charge is imposed during both the
accumulation phase and the annuity payout phase and may not be increased. The
daily Administrative Expense Charge is assessed to help defray administrative
expenses actually incurred in the administration of the Sub-Account. There is no
direct relationship, however, 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 below 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 Contract 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.
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 SAI of the Underlying Funds contain additional information
concerning expenses of the Underlying Funds.
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B. CONTRACT FEE
A $35 Contract fee (a lower fee may apply in some states) currently is deducted
during the accumulation phase, on the Contract anniversary date and upon full
surrender of the Contract if the Accumulated Value on any of these dates is less
than $75,000.
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 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 portion of
the charge deducted from that Sub-Account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the Issue Date, either the Owner or the Annuitant is within the following
class of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Funds; investment
managers or sub-advisers of the Underlying Funds; and the spouses of and
immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents.
C. OPTIONAL RIDER CHARGE
Subject to state availability, the Company offers a rider that is available only
if elected by the Owner at issue. A separate monthly charge is made for the
Rider through a pro-rata reduction of the Accumulated Value of the Sub-Accounts,
the Fixed Account and the Guarantee Period Accounts. The pro-rata reduction is
based on the relative value that the Accumulation Units of the Sub-Accounts, the
dollar amounts in the Fixed Account and the dollar amounts in the Guarantee
Period Accounts bear to the total Accumulated Value.
The applicable charge for the Rider is assessed on the Accumulated Value on the
last day of each Contract month and, if applicable, on the date the Rider is
terminated, multiplied by 1/12th of the following annual percentage rate:
<TABLE>
<S> <C>
5% Enhanced Death Benefit With Annual Step-Up............... 0.25%
</TABLE>
For a description of the Rider, see "Optional Enhanced Death Benefit Rider"
under "F. Death Benefit," DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION PHASE,
above.
D. 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 payments were received,
the premium tax charge is 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 a Contract at the time 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.
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If no amount for premium tax was deducted at the time the 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 Contract value at
the time such determination is made.
E. TRANSFER CHARGE
The Company currently does not assess a charge for processing transfers. The
Company guarantees that the first 12 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 to
reimburse it for the expense of processing transfers. For more information, see
"D. Transfer Privilege" under DESCRIPTION OF THE CONTRACT -- THE ACCUMULATION
PHASE and "E. Transfers of Annuity Units" under ANNUITIZATION -- THE PAYOUT
PHASE.
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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 1933 Act or
the 1940 Act. Accordingly, the staff of the SEC 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 Contract or any fixed benefits offered under these
accounts may be subject to the provisions of the 1933 Act relating to the
accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account except in
California where it is accounted for in the Company's General Account. Each
Guarantee Period Account 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. Once an interest rate is in effect
for a Guarantee Period Account, however, the Company may not change it during
the duration of its Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%. The Guarantee Period Accounts are not available in New
York, Oregon, Maryland, and Pennsylvania.
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 initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period.
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
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 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 Sub-Account.
The 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 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 automatically
will be applied to a new Guarantee Period Account with the same duration at the
then current rate unless (1) less than $1,000 would remain in the Guarantee
Period Account on the expiration date, or (2) unless 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 the Sub-Account investing
in the Money Market Sub-Account. Where amounts have been renewed automatically
in a new Guarantee Period, the Company will give the Owner an additional 30 days
to transfer out of the Guarantee Period Account without application of a Market
Value Adjustment.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or 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 "F. Death Benefit." All
other transfers, withdrawals, or a surrender prior to the end of a Guarantee
Period will be subject to a Market Value Adjustment, which may increase or
decrease the value. Amounts
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<PAGE>
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 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.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited; however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value is also affected by the minimum guaranteed rate of 3%. The amount that
will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, See APPENDIX C, THE MARKET VALUE
ADJUSTMENT.
WITHDRAWALS. Prior to the Annuity Date, the 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 "E. Surrender and Withdrawals." In addition, the following provisions also
apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals unless made at the end of the Guarantee
Period; and (2) the Company reserves the right to 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.
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<PAGE>
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
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 IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with the Contract.
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 ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
A. GENERAL
THE COMPANY. The Company intends to make a charge for any effect which the
income, assets, or existence of the Contract, 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 Owners and with respect to each separate account as though that
separate account was 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 Code. The Company files a consolidated tax return with its affiliates.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. The regulations prescribed by the
Treasury Department 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. Under this section of the Code, if
the investments are not adequately diversified, the Contract will not be treated
as an annuity contract, and therefore the income on the Contract, for any
taxable year of the Owner, would be treated as ordinary income received or
accrued by the Owner. It is anticipated that the Underlying Portfolios will
comply with the current diversification requirements. In the event that future
IRS regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
INVESTOR CONTROL. In order for a variable annuity contract to qualify for tax
deferral, the Company, and not the variable contract owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity contract owners may now be considered the owners of these
assets for federal income tax purposes. Specifically, the IRS has stated in
published rulings that a variable annuity contract owner may be considered the
owner of segregated account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations do not provide guidance governing the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account. This announcement also states
that guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their
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<PAGE>
investments to particular sub-accounts without being treated as owners of the
underlying assets." As of the date of this Prospectus, no such guidance has been
issued. The Company therefore additionally reserves the right to modify the
Contract as necessary in order to attempt to prevent a contract owner from being
considered the owner of a pro rata share of the assets of the segregated asset
account underlying the variable annuity contracts.
B. 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 408 and 408A 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, depending on 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 "E. Individual Retirement Annuities" below.
C. TAXATION OF THE CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owner" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner will be taxed on the annual increase in Accumulated Value. The Owner
should consult tax and financial advisors for more information. This section
governs the taxation of annuities. The following discussion concerns annuities
subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. Under the current provisions of the Code, amounts
received under an annuity contract prior to annuitization (including payments
made upon the death of the annuitant or owner), generally are first attributable
to any investment gains credited to the contract over the taxpayer's "investment
in the contract." Such amounts will be treated as gross income subject to
federal income taxation. "Investment in the contract" is the total of all
payments to the Contract which were not excluded from the Owner's gross income
less any amounts previously withdrawn which were not included in income. Section
72(e)(11)(A)(ii) requires that all non-qualified deferred annuity contracts
issued by the same insurance company to the same owner during a single calendar
year be treated as one contract in determining taxable distributions.
WITHDRAWALS AFTER ANNUITIZATION. A withdrawal from a qualified or non-qualified
Contract may create significant adverse tax consequences. It is possible that
the Internal Revenue Service may take the view that when withdrawals (other than
annuity payments) are taken during the annuity payout phase of the Contract, all
amounts received by the taxpayer may be taxable at ordinary income rates as
amounts "not received as an annuity." In addition, such amounts may be taxable
to the recipient without regard to the Owner's investment in the Contract or any
investment gain that might be present in the current Annuity Value.
For example, assume that a Contract owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 during the annuity payout phase.
Under this view, the Contract owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, such as those under age 59 1/2,
additional tax penalties may also apply.
OWNERS OF QUALIFIED AND NON-QUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE
TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS
PRIOR TO THE EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO
CONTACT THEIR TAX ADVISER PRIOR TO MAKING WITHDRAWALS.
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<PAGE>
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments begin under
the Contract, generally a portion of each payment may be excluded from gross
income. The excludable portion generally is determined by a formula that
establishes the ratio that the investment in the Contract bears to the expected
return under the Contract. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all the investment 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
Owner's final tax return.
PENALTY ON DISTRIBUTION. 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 on withdrawals:
- taken on or after age 59 1/2; or
- if the withdrawal follows the death of the Owner (or, if the Owner is not
an individual, the death of the primary Annuitant, as defined in the Code);
or
- in the case of the Owner's "total disability" (as defined in the Code); or
- 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.
The requirement of "substantially equal" periodic payments is met when the Owner
elects to have distributions made over the Owner's life expectancy, or over the
joint life expectancy of the Owner and beneficiary. The requirement is also met
when the number of units withdrawn to make each distribution is substantially
the same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the later of the Owner's age 59 1/2 or five years,
will subject the Owner to the 10% penalty tax on the prior distributions.
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, 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, therefore, were subject to the 10%
federal penalty tax. This Private Letter Ruling may be applicable to an Owner
who receives distributions under any LED-type 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.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the 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 any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the Issue Date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
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<PAGE>
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well.
D. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified 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.
E. INDIVIDUAL RETIREMENT ANNUITIES
Federal income taxation of assets held inside an individual retirement annuity
and of earnings on those assets is deferred until distribution of plan benefits
begin. As such, it is not necessary to purchase a variable annuity contract
solely to obtain its tax deferral feature. However, other features offered under
this Contract and described in this Prospectus -- such as the minimum guaranteed
death benefit, the guaranteed fixed annuity rates and the wide variety of
investment options -- may make this Contract a suitable investment for your
individual retirement annuity.
Sections 408 and 408A of the Code permits eligible individuals to contribute to
an individual retirement program known as an Individual Retirement Annuity
("IRA"). Note: This term covers all IRAs permitted under Sections 408 and 408A
of the Code, including Roth IRAs. IRAs are subject to limits on the amounts that
may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Contract will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to cancel the Contract as described in this Prospectus. See "C. Right to
Cancel."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) for their employees using IRAs. Employer
contributions that may be made to such plans are larger than the amounts that
may be contributed to regular IRAs and may be deductible to the employer.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequently as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans may in the future be confirmed quarterly
rather than by immediate confirmations.) The Owner should review the information
in all statements carefully. All errors or corrections must be reported to the
Company immediately to assure proper crediting to the Contract. The Company will
assume that all transactions are accurately reported on confirmation statements
and quarterly/annual statements unless the Owner notifies the Principal Office
in writing within 30 days after receipt of the statement.
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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 no longer are 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 Owner and prior approval of the SEC and state insurance 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 an 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 SEC 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
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to variable accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Underlying Funds also are 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
owners or variable annuity owners. Although the Company and the Underlying Funds
do not currently foresee any such disadvantages to either variable life
insurance owners or variable annuity owners, the Company and the respective
trustees intend to monitor events in order to identify any material conflicts
between such 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 is made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. If the Company deems it to be in the best interest of Owners, and
subject to any approvals that may be required under applicable law, the Variable
Account or any Sub-Account(s) 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.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements, to:
(1) transfer assets from the Variable Account or Sub-Account to another of
the Company's variable 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,
(4) to substitute the shares of any other registered investment company for
the Fund shares held by a Sub-Account, in the event that Fund shares are
unavailable for investment, or if the Company determines that further
investment in such 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 be made without notice to Owners in
accordance with the 1940 Act.
41
<PAGE>
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation (or any laws, regulations or rules of any
jurisdiction in which the Company is doing business), including but not limited
to requirements for annuity contracts and retirement plans under the Code and
pertinent regulations or any state statute or regulation. Any such changes will
apply uniformly to all Contracts that are affected. Owners will be given written
notice of such changes.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners. 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 that are received. The Company also will 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 an Owner 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 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 Owner will be determined by dividing the reserve held in
each Sub-Account for the Owner's Variable Annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Owner's voting interest in the Underlying
Fund will decrease as the reserve for the Variable Annuity is depleted.
DISTRIBUTION
The Contracts offered by this 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, MA 01653, is also the principal underwriter and distributor and is an
indirect wholly owned subsidiary of First Allmerica. The Contract also may be
purchased from certain independent broker-dealers that are NASD members.
The Company does not pay commissions to representatives of Allmerica
Investments, Inc. or to independent broker-dealers who sell the Contract.
However, a representative of Allmerica Investments, Inc. or an independent
broker-dealer may assess an advisory fee as compensation for his or her
services. To the extent permitted by NASD rules, promotional incentives or
payments may be provided to such broker-dealers based on sales volumes, the
assumption of wholesaling functions, or other sales-related criteria. Additional
payments may be made for other services not directly related to the sale of the
Contract, including the recruitment and training of personnel, production of
promotional literature, and similar services.
The Company intends to recoup the cost of promotional and other sales expenses
through profits from the Company's General Account, which may include amounts
derived from mortality and risk charges.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-533-7881.
42
<PAGE>
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to its total assets or that relates to the Separate
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
has completed the process of modifying or replacing existing software and
believes that this action will resolve the Year 2000 issue. However, should
there be serious unanticipated interruptions from unknown sources, the Year 2000
issue could have a material adverse impact on the operations of the Company.
Specifically, the Company could experience, among other things, an interruption
in its ability to collect and process premiums, process claim payments,
safeguard and manage its invested assets, accurately maintain policyholder
information, accurately maintain accounting records, and perform customer
service. Any of these specific events, depending on duration, could have a
material adverse impact on the results of operations and the financial position
of the Company.
The Company is engaged in formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issue. The Company's
total Year 2000 project cost and estimates to complete the project include the
estimated costs and time associated with the Company's involvement on a third
party's Year 2000 program, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company does not believe that it has material exposure to contingencies related
to the Year 2000 issue for the products it has sold. Although the Company does
not believe that there is a material contingency associated with the Year 2000
issue, there can be no assurance that exposure for material contingencies will
not arise.
The cost of the Year 2000 project is being expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $61
million related to the assessment, plan development and substantial completion
of the Year 2000 project through June 30, 1999. The total remaining cost of the
project is estimated between $10-$15 million.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
43
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity Contract and the Fixed Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in this Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to a
separate account. 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 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 Contract, 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.
STATE RESTRICTIONS. In Massachusetts, payments and transfers to the Fixed
Account are subject to the following restrictions:
If a Contract is issued prior to the Annuitant's 60th birthday, allocations
to the Fixed Account will be permitted until the Annuitant's 61st birthday.
On and after the Annuitant's 61st birthday, no additional Fixed Account
allocations will be accepted. If a Contract is issued on or after the
Annuitant's 60th birthday, up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no additional
allocations to the Fixed Account will be permitted. If a Contract is issued
after the Annuitant's 81st birthday, no payments to the Fixed Account will
be permitted at any time.
In Oregon, no payments to the Fixed Account will be permitted if a Contract is
issued after the Annuitant's 81st birthday. If an allocation designated as a
Fixed Account allocation is received at the Principal Office during a period
when the Fixed Account is not available due to the limitations outlined above,
the monies will be allocated to the Money Market Sub-Account.
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAMS. To the extent
permitted by law, the Company reserves the right to offer Enhanced Automatic
Transfer Program(s) from time to time. If you elect to participate, the Company
will credit an enhanced interest rate to payments made to the Enhanced Automatic
Transfer Program. Eligible payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source account,
- must be automatically transferred out of the Fixed Account to one or more
Sub-Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed Account.
You may be able to establish more than one Enhanced Automatic Transfer Program.
Payments made to the Contract during the same month will be part of the same
Enhanced Automatic Transfer Program if the length of the time period is the same
and the enhanced rate is the same. The allocation for all of the amounts in the
same program will be in accordance with the instructions for the most recent
payment to this program. The monthly transfer will be made on the date
designated for the initial payment to this program. The amount allocated will be
determined by dividing the amount in the program by the number of remaining
months. For
A-1
<PAGE>
example, for a six-month program, the first automatic transfer will be 1/6th of
the balance; the second automatic transfer will be 1/5th of the balance, and so
on.
Payments to different Enhanced Automatic Transfer Programs will be handled in
accordance with the instructions for each particular program.
A-2
<PAGE>
APPENDIX B -- PERFORMANCE INFORMATION
This Contract was first offered to the public in ____. However, in order to help
people understand how investment performance can affect money invested in the
Sub-Accounts, the Company may advertise "total return" and "average annual total
return" performance information based on (1) the periods that the Sub-Accounts
have been in existence and (2) the periods that the Underlying Funds have been
in existence. Performance results in the Table 1 reflect the applicable
deductions for the Contract fee, Sub-Account charges and Underlying Fund charges
under this Contract and also assume that the Contract is surrendered at the end
of the applicable period. Performance results in Table 2 do not include the
Contract fee and assume that the Contract is not surrendered at the end of the
applicable period. Neither set of tables include optional Rider charges. 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. The "average annual total" return represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund 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.
Quotations of average annual total return as shown in the Table are calculated
in the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 0.80%, the
effect of the $35 annual Contract fee, and the Underlying Fund charges which
would be assessed if the investment were completely withdrawn at the end of the
specified period. The calculation is not adjusted to reflect the deduction of
any optional Rider charges. Quotations of supplemental average total returns, as
shown in Table 2, are calculated in exactly the same manner and for the same
periods of time except that it does not reflect the Contract fee and assumes
that the Contract is not surrendered at the end of the periods shown.
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS 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.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to:
(1) the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index
or other unmanaged indices, so that
B-1
<PAGE>
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; or
(2) 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, who rank such
investment products on overall performance or other criteria; or
(3) 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. In
addition, relevant broad-based indices and performance from independent
sources may be used to illustrate the performance of certain Contract
features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
B-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND*
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR
UNDERLYING FUND ENDED 5 10 YEARS OR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS INCEPTION IF LESS
- ---------------------------------------- --------------- --------------- -------- -----------------
<S> <C> <C> <C> <C>
Equity Index Fund........................ 9/28/90 25.55% 20.65% 17.97%
Money Market Fund........................ 4/29/85 2.92% 2.63% 3.03%
</TABLE>
TABLE 2
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND*
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR
UNDERLYING FUND ENDED 5 10 YEARS OR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS INCEPTION IF LESS
- ---------------------------------------- --------------- --------------- -------- -----------------
<S> <C> <C> <C> <C>
Equity Index Fund........................ 9/28/90 27.30% 22.40% 19.72%
Money Market Fund........................ 4/29/85 4.67% 4.38% 4.78%
</TABLE>
*While this Contract utilizes an existing Separate Account, the Sub-Accounts are
new so there are no historical figures available.
B-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND*
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR
UNDERLYING FUND ENDED 5 10 YEARS OR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS INCEPTION IF LESS
- ---------------------------------------- --------------- --------------- -------- -----------------
<S> <C> <C> <C> <C>
Equity Index Fund........................ 9/28/90 25.80% 20.90% 18.22%
Money Market Fund........................ 4/29/85 3.17% 2.88% 3.28%
</TABLE>
TABLE 2
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND*
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR
UNDERLYING FUND ENDED 5 10 YEARS OR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS INCEPTION IF LESS
- ---------------------------------------- --------------- --------------- -------- -----------------
<S> <C> <C> <C> <C>
Equity Index Fund........................ 9/28/90 27.30% 22.40% 19.72%
Money Market Fund........................ 4/29/85 4.67% 4.38% 4.78%
</TABLE>
*While this Contract utilizes an existing Separate Account, the Sub-Accounts are
new so there are no historical figures available.
B-4
<PAGE>
APPENDIX C
THE MARKET VALUE ADJUSTMENT
MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)] to the power of n/365 -1
A payment of $50,000 is made on the Issue Date and no additional payments are
made. 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 (2,555 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 or 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.
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)] to the power of n/365 -1
= [(1+.08)/(1+.10)] to the power of 2555/365 -1
= (.98182) to the power of 7 -1
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 X $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)] to the power of n/365-1
= [(1+.08)/(1+.07)] to the power of 2555/365-1
= (1.00935) to the power of 7-1
= .06728
The market value adjustment = the market value factor multiplied by the withdrawal
= .06728 X $62,985.60
= $4,237.90
</TABLE>
*Uncapped is a straight application of the Market Value Adjustment formula when
the value produced is less than the cap.
C-1
<PAGE>
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)] to the power of n/365-1
= [(1+.08)/(1+.11)] to the power of 2555/365-1
= (.97297) to the power of 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 X $62,985.60 or -$8,349.25)
= Minimum (-$10,992.38 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 5.00% or 0.05
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.05)] to the power of 2555/365-1
= (1.02857) to the power of 7 - 1
= .21798
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
= Minimum of (.21798 X $62,985.60 or $8,349.25)
= Minimum of ($13,729.78 or $8,349.25)
= $8,349.25
</TABLE>
*Capped takes into account the excess interest part of the Market Value
Adjustment formula when the value produced is greater than the cap.
C-2
<PAGE>
APPENDIX D
EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS
Assume in the examples below that a 65-year-old male annuitizes his contract
exactly two years after the Issue Date. The annuitization amount is $250,000.
Further assume that he selects a variable Life with Period Certain annuity
payout option of Single Life with Payments Guaranteed for 10 Years, an Assumed
Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the
Annuity Value purchases 1,370 Annuity Units and the first monthly annuity
benefit payment is equal to $1,370. The following examples assume a net return
of 8% (gross return of 9.4%).
PRESENT VALUE WITHDRAWALS
EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the tenth contract year (eighth year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Guaranteed Annuity Benefit Payments = $65,849.08
Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 * 75%)
Annuity Units after withdrawal = 342.50 (1,370 * (1 -
(49,386.81/65,849.08)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $477.27
Because this is a Present Value Withdrawal, the number of Annuity Units will
increase to 1,370 after the end of the 10-year period during which the Company
guaranteed to make payments.
PAYMENT WITHDRAWALS
EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the tenth contract year (eighth year of the Annuity
Payout phase).
Last Monthly Annuity Benefit Payment = $1,820.71
Withdrawal Amount = $18,207.10 (10 * 1,820.71)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment prior to withdrawal = $1,909.09
Rate used in Present Value Determination = 3% (3% AIR)
Present Value of Future Annuity Benefit Payments = $268,826.18
Annuity Units after withdrawal = 1,272.71 (1,370 * (1 -
(18,207.10/268,826.18)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Benefit Payment after withdrawal = $1,779.80
Because this is a Payment Withdrawal, the number of Annuity Units will not
increase after the end of the 10-year period during which the Company guaranteed
to make payments.
D-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF ALLMERICA INVESTMENT TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE ALLMERICA ____ ADVANTAGE PROSPECTUS FOR SEPARATE ACCOUNT
VA-K (EXECANNUITY PLUS/ALLMERICA ADVANTAGE) DATED ______, 1999 ("THE
PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, FIRST
ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440 LINCOLN STREET, WORCESTER,
MASSACHUSETTS 01653, TELEPHONE 1-800-533-7881.
DATED ______, 1999
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY.............................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY................................................................2
SERVICES....................................................................3
UNDERWRITERS................................................................3
ANNUITY BENEFIT PAYMENTS....................................................4
PERFORMANCE INFORMATION.....................................................5
FINANCIAL STATEMENTS........................................................F-1
GENERAL INFORMATION AND HISTORY
Separate Account VA-K (the "Variable Account") is a separate investment account
of First Allmerica Financial Life Insurance Company (the "Company") established
by vote of its Board of Directors on August 20, 1991. The Company, organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, the Company and its subsidiaries
had over $27 billion in combined assets and over $48 billion of life insurance
in force. Effective October 16, 1995, the Company converted from a mutual life
insurance company, known as State Mutual Life Assurance Company of America, to a
stock life insurance company and adopted its present name. The Company is a
wholly owned subsidiary of Allmerica Financial Corporation ("AFC"). The
Company's principal office (the "Principal Office") is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, telephone (508) 855-1000.
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
in Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
Currently, 2 Sub-Accounts of the Variable Account are available under the
Allmerica ___ Advantage contract (the "Contract"). Each Sub-Account invests in a
corresponding investment portfolio of Allmerica Investment Trust (the "Trust").
The Trust is managed by Allmerica Financial Investment Management Services, Inc.
The Trust is an open-end, diversified management investment company. Two
different funds of the Trust are available under the Contract: the Equity Index
Fund and the Money Market Fund. Each Fund available under the Contract
(together, the "Underlying Funds") has its own investment objectives and certain
attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
contracts, other than for state and local premium taxes and similar assessments
when applicable. The Company
2
<PAGE>
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 life insurance company under
Subchapter L of the Internal Revenue Code (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 the Contract or the Variable 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 ("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 is not represented by any
transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Separate Account VA-K Allmerica Advantage Variable
Annuity and ExecAnnuity Plus Variable Annuity (commonly referred to as Separate
Account VA-K) of the Company as of December 31, 1998 and for the periods
indicated, included in this Statement of Additional Information constituting
part of this Registration Statement, have been so included in reliance on the
reports of PricewaterhouseCoopers 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
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), 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 Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract 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 presently is
indirectly wholly owned by the Company.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from NASD registered representatives of Allmerica Investments and from
certain independent broker-dealers which are NASD members and whose
representatives are authorized by applicable law to sell variable annuity
contracts. No commissions will be paid for sales of Contract A3030-99. However,
a representative of Allmerica Investments or an independent broker-dealer may
assess an advisory fee as compensation for his or her services.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity policies. To the
extent permitted by NASD rules, promotional incentives or payments also may be
provided to such entities based on sales volumes, the assumption of wholesaling
functions or other sales-related criteria. Additional payments may be made for
other services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature and
similar services.
3
<PAGE>
The aggregate amounts of commissions paid to representatives of Allmerica
Investments, Inc. with respect to sales of contracts A3018-91, A3021-93,
A3025-96 and A3029-99 were $3,517,207.62 in 1998, $3,098,375.76 in 1997 and
$2,562,619.40 in 1996.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" 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 $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period....................................$ 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) divided by (2)................0.000335
(5) Annual Charge (one-day equivalent of 0.80% per annum).....................................0.000022
(6) Net Investment Rate (4) - (5).............................................................0.000313
(7) Net Investment Factor 1.000000 + (6)......................................................1.000313
(8) Accumulation Unit Value -- Current Period (1) x (7).....................................$ 1.135355
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains of $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.135405.
The method for determining the amount of annuity benefit payments is described
in detail under "Variable Annuity Benefit Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit Value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Owner has 40,000 Accumulation Units in a Variable Account, and that the value
of an Accumulation Unit on the Valuation Date used to determine the amount of
the first variable annuity benefit payment is $1.120000. Therefore, the
Accumulated Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax, the first monthly
payment would be $44.80 ($44,800 divided by 1,000) multiplied by $6.57, or
$294.34.
4
<PAGE>
Next, assume that the Annuity Unit Value for the assumed investment return of
3.0% per annum for the Valuation Date as of which 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 3.0% assumed investment
return 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 benefit payment is 1.000190. Multiplying this
factor by .999919 (the one-day adjustment factor for the assumed investment
return of 3.0% per annum) produces a factor of 1.000109. This then is 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 $1.105121 for the
current monthly payment. The current monthly payment then is determined by
multiplying the number of Annuity Units by the current Annuity Unit Value, or
267.5818 times $1.105121, 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 material information on various
topics of interest to Owners and prospective 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 Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying Fund and an underlying
Sub-Account have been in existence, even if longer than the period of time that
the Contract has been offered. The results for any period prior to a Contract
being offered will be calculated as if the Contract had been offered during that
period of time, with all charges assumed to be those applicable to the Contract.
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-Account's asset charge.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). 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)(n) = ERV
Where: P = a hypothetical initial payment to the Variable 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 assets
of the Sub-Account. This charge is 0.80% on an annual basis. The calculation of
ending redeemable value assumes (1) the Contract was issued at the beginning of
the period, and (2) a complete surrender of the Contract at the end of the
period.
The calculations of Total Return include the deduction of the $30 annual
Contract fee.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1998:
Yield 3.64%
Effective Yield 3.71%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. 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, 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.
The Money Market Sub-Account 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 reflect the $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account VA-K.
6
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 18 and Note 20,
which are as of March 19, 1999 and April 1, 1999, respectively
<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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................................ $2,303.9 $2,311.0 $2,236.3
Universal life and investment product policy fees....... 296.6 237.3 197.2
Net investment income................................... 613.7 641.8 670.8
Net realized investment gains........................... 62.6 76.5 66.8
Other income............................................ 142.6 117.6 108.4
-------- -------- --------
Total revenues...................................... 3,419.4 3,384.2 3,279.5
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment
expenses.............................................. 2,050.2 2,004.6 1,957.0
Policy acquisition expenses............................. 452.8 425.1 470.1
Sales practice litigation............................... 31.0 -- --
Loss from exiting reinsurance pools..................... 25.3 -- --
Loss from cession of disability income business......... -- 53.9 --
Restructuring costs..................................... 13.0 -- --
Other operating expenses................................ 559.0 523.7 503.2
-------- -------- --------
Total benefits, losses and expenses................. 3,131.3 3,007.3 2,930.3
-------- -------- --------
Income before federal income taxes.......................... 288.1 376.9 349.2
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current................................................. 67.6 83.3 96.8
Deferred................................................ (15.4) 14.2 (15.7)
-------- -------- --------
Total federal income tax expense.................... 52.2 97.5 81.1
-------- -------- --------
Income before minority interest............................. 235.9 279.4 268.1
Minority interest....................................... (55.0) (79.4) (74.6)
-------- -------- --------
Net income.................................................. $ 180.9 $ 200.0 $ 193.5
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$7,520.8 and $6,992.8)................................. $ 7,683.9 $ 7,253.5
Equity securities at fair value (cost of $253.1 and
$341.1)................................................ 397.1 479.0
Mortgage loans.......................................... 562.3 567.5
Real estate............................................. 20.4 50.3
Policy loans............................................ 154.3 141.9
Other long-term investments............................. 142.7 148.3
--------- ---------
Total investments................................... 8,960.7 8,640.5
--------- ---------
Cash and cash equivalents................................. 504.0 213.9
Accrued investment income................................. 141.0 141.8
Deferred policy acquisition costs......................... 1,161.2 965.5
--------- ---------
Reinsurance receivables:
Future policy benefits.................................. 322.6 307.1
Outstanding claims, losses and loss adjustment
expenses............................................... 652.2 626.7
Other................................................... 161.6 106.4
--------- ---------
Total reinsurance receivables....................... 1,136.4 1,040.2
--------- ---------
Deferred federal income taxes............................. 19.4 --
Premiums, accounts and notes receivable................... 510.5 554.4
Other assets.............................................. 530.6 373.0
Closed Block assets....................................... 803.1 806.7
Separate account assets................................... 13,697.7 9,755.4
--------- ---------
Total assets........................................ $27,464.6 $22,491.4
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,802.2 $ 2,598.5
Outstanding claims, losses and loss adjustment
expenses............................................... 2,815.9 2,825.0
Unearned premiums....................................... 843.2 846.8
Contractholder deposit funds and other policy
liabilities............................................ 2,637.0 1,852.7
--------- ---------
Total policy liabilities and accruals............... 9,098.3 8,123.0
--------- ---------
Expenses and taxes payable................................ 681.9 662.6
Reinsurance premiums payable.............................. 50.2 37.7
Short-term debt........................................... 221.3 33.0
Deferred federal income taxes............................. -- 12.9
Long-term debt............................................ -- 2.6
Closed Block liabilities.................................. 872.0 885.6
Separate account liabilities.............................. 13,691.5 9,749.7
--------- ---------
Total liabilities................................... 24,615.2 19,507.1
--------- ---------
Minority interest......................................... 532.9 748.9
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares authorized,
500,000 shares issued and outstanding................... 5.0 5.0
Additional paid-in capital................................ 444.0 453.7
Accumulated other comprehensive income.................... 169.2 209.3
Retained earnings......................................... 1,698.3 1,567.4
--------- ---------
Total shareholder's equity.......................... 2,316.5 2,235.4
--------- ---------
Total liabilities and shareholder's equity.......... $27,464.6 $22,491.4
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................................ $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 453.7 392.4 392.4
Contributed from parent................................. -- 61.3 --
Loss on change of interest -- Allmerica P&C............. (9.7) -- --
-------- -------- --------
Balance at end of period................................ 444.0 453.7 392.4
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period.......................... 209.3 131.4 153.0
Appreciation (depreciation) during the period:
Net (depreciation) appreciation on available-for-sale
securities............................................ (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal income taxes... 28.9 (59.8) 11.8
Minority interest....................................... 13.4 (33.2) 1.7
-------- -------- --------
(40.1) 77.9 (21.6)
-------- -------- --------
Balance at end of period................................ 169.2 209.3 131.4
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period.......................... 1,567.4 1,367.4 1,173.9
Net income.............................................. 180.9 200.0 193.5
Dividend to shareholder................................. (50.0) -- --
-------- -------- --------
Balance at end of period................................ 1,698.3 1,567.4 1,367.4
-------- -------- --------
Total shareholder's equity.......................... $2,316.5 $2,235.4 $1,896.2
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $180.9 $200.0 $193.5
------ ------ ------
Other comprehensive income:
Net (depreciation) appreciation on available-for-sale
securities.............................................. (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal income taxes..... 28.9 (59.8) 11.8
Minority interest......................................... 13.4 (33.2) 1.7
------ ------ ------
Other comprehensive income.............................. (40.1) 77.9 (21.6)
------ ------ ------
Comprehensive income...................................... $140.8 $277.9 $171.9
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<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) 1998 1997 1996
- ------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 180.9 $ 200.0 $ 193.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest................................... 55.0 79.4 74.6
Net realized gains.................................. (62.7) (77.8) (66.8)
Net amortization and depreciation................... 20.7 31.6 44.7
Deferred federal income taxes....................... (15.4) 14.2 (15.7)
Loss from exiting reinsurance pools................. 25.3 -- --
Sales practice litigation expense................... 31.0 -- --
Payment related to exiting reinsurance pools........ (30.3) -- --
Loss from cession of disability income business..... -- 53.9 --
Payment related to cession of disability income
business............................................ -- (207.0) --
Change in deferred acquisition costs................ (185.8) (189.7) (73.9)
Change in premiums and notes receivable, net of
reinsurance payable................................. 56.7 (15.1) (16.8)
Change in accrued investment income................. 0.8 7.1 16.7
Change in policy liabilities and accruals, net...... 168.1 (134.9) (184.3)
Change in reinsurance receivable.................... (115.4) 27.2 123.8
Change in expenses and taxes payable................ (3.3) 49.4 26.0
Separate account activity, net...................... (48.5) -- 5.2
Other, net.......................................... (63.8) 20.4 38.5
--------- --------- ---------
Net cash provided by (used in) operating
activities.......................................... 13.3 (141.3) 165.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities.................... 1,929.1 2,892.9 3,985.8
Proceeds from disposals of equity securities............ 285.3 162.7 228.7
Proceeds from disposals of other investments............ 120.8 116.3 99.3
Proceeds from mortgages matured or collected............ 171.2 204.7 176.9
Purchase of available-for-sale fixed maturities......... (2,588.4) (2,596.0) (3,771.1)
Purchase of equity securities........................... (119.9) (67.0) (90.9)
Purchase of other investments........................... (274.4) (175.0) (168.0)
Capital expenditures.................................... (0.7) (15.3) (12.8)
Purchase of minority interest in Citizens Corporation... (195.9) -- --
Other investing activities, net......................... 5.1 1.3 4.3
--------- --------- ---------
Net cash (used in) provided by investing
activities.......................................... (667.8) 524.6 452.2
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit
funds.................................................. 1,419.2 457.6 268.7
Withdrawals from contractholder deposit funds........... (625.0) (647.1) (905.0)
Change in short-term debt............................... 188.3 (5.4) 10.4
Change in long-term debt................................ (2.6) (0.1) (0.1)
Dividend paid to parent................................. (50.0) -- --
Dividends paid to minority shareholders................. -- (9.4) (3.9)
Additional paid-in capital.............................. -- 0.1 --
Subsidiary treasury stock purchased, at cost............ (1.0) (140.0) (42.0)
--------- --------- ---------
Net cash provided by (used in) financing
activities.......................................... 928.9 (344.3) (671.9)
--------- --------- ---------
Net change in cash and cash equivalents..................... 274.4 39.0 (54.2)
Net change in cash held in the Closed Block................. 15.7 (1.0) (6.5)
Cash and cash equivalents, beginning of period.............. 213.9 175.9 236.6
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 504.0 $ 213.9 $ 175.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 7.3 $ 3.6 $ 18.6
Income taxes paid........................................... $ 133.5 $ 66.3 $ 72.0
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First Allmerica Financial Life
Insurance Company ("FAFLIC", or the "Company"), a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"), include the accounts of its wholly
owned life insurance subsidiary Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), its non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property and Casualty
Companies, Inc. ("Allmerica P&C") (a 70.06%-owned non-insurance holding
company). The Closed Block (Note 1B) assets and liabilities at December 31, 1998
and 1997, and its results of operations subsequent to demutualization are
presented in the consolidated financial statements as single line items. Unless
specifically stated, all disclosures contained herein supporting the
consolidated financial statements at December 31, 1998 and 1997, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
On December 3, 1998, the Company acquired all of the outstanding common stock of
Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary of
Hanover, a wholly owned subsidiary of Allmerica P&C) that it did not already own
in exchange for cash of $195.9 million (Note 3). The acquisition has been
recognized as a purchase. The minority interest acquired totaled $158.5 million.
A total of $40.8 million representing the excess of the purchase price over the
fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
Allmerica P&C and a wholly owned subsidiary of AFC merged on July 16, 1997.
Through the merger, AFC acquired all of the outstanding common stock of
Allmerica P&C that it did not already own in exchange for cash and stock. The
merger has been accounted for as a purchase. A total of $90.6 million,
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period. Additional information pertaining to the
merger agreement is included in Note 2, significant transactions.
Minority interest relates to the Company's investment in Allmerica P&C and its
only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's wholly 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
The Company established and began operating a closed block (the "Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies, individual deferred
annuity contracts and supplementary contracts not involving life contingencies
which were in force as of FAFLIC's demutualization on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts. 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 policies are in force. 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
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as 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 policies 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 the inception of the Closed
Block, 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 at inception.
If, over the period the policies 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 (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
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
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 the Company 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 the Company believes may not be collectible in
full. In establishing reserves, the Company 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.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company adopted a plan to dispose of all real estate assets by
the end of 1998. As of December 31, 1998, there were 7 properties remaining in
the Company's real estate portfolio, all of which are being actively marketed.
As a result of the plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less costs of disposal.
Depreciation is not recorded on these assets while they are held for disposal.
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 are included
in realized investment gains or losses.
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, swap contracts 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.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Default swap contracts entered into
for investment purposes are accounted for using the fair value method, with
changes in fair value, if any, reported in realized investment gains and losses
in earnings. Premium paid to the Company on default swap contracts is reported
in net investment income in earnings. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings. Any
ineffective swaps or futures hedges are recognized currently in realized
investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes 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
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from this group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and other life
insurance products 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 life product and property and casualty line
of business 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, the Company
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
shareholder's 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 policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, 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 policies are computed using interest rates ranging from 2 1/2% to 7 1/4%
for life insurance and 2 1/2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies 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 ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE 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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies 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. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.
K. FEDERAL INCOME TAXES
AFC and its 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. Prior to the merger on July 16,
1997, Allmerica P&C and its subsidiaries filed a separate United States federal
income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
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 ("Statement
No. 109"). These differences result primarily from loss and LAE reserves, policy
reserves, policy acquisition expenses, and unrealized appreciation or
depreciation on investments.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did not
have a material effect on the results of operations or financial position for
the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed and determinable. In addition, it provides criteria for when
an asset may be recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations. (Note 12)
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No.
130 which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement No. 130 for the first quarter of 1998, which resulted primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
On December 3, 1998 Citizens Acquisition Corporation, a wholly owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens prior to December 3, 1998. The unaudited pro forma information below
presents consolidated results of operation as if the acquisition had occurred at
the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,405.1 $3,366.3
======== ========
Net realized capital gains included in revenue.............. $ 59.8 $ 71.8
======== ========
Income before taxes and minority interest................... 272.9 358.0
Income taxes................................................ (47.2) (91.3)
Minority Interest:
Equity in earnings...................................... (42.6) (64.1)
-------- --------
Net income.................................................. $ 183.1 $ 202.6
======== ========
</TABLE>
On October 29, 1998, the Company announced that had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the Company, in its Corporate Risk Management Services segment, has exited its
accident and health assumed reinsurance pool business, as well as its
administrative services only business. Additionally, it has commenced the
closing of nearly half of its nationwide Corporate Risk Management Services'
sales offices, eliminated certain staff and discontinued certain automation
initiatives. In addition to the aforementioned initiatives in the Corporate Risk
Management Services segment, the Property and Casualty segment is consolidating
its field support activities from fourteen regional branches into three hub
locations. As a result of the Company's restructuring initiative, it recognized
a pretax loss of $13.0 million, in the fourth quarter of 1998. Approximately
$5.5 million of this loss relates to severance and other employee related costs
resulting from the elimination of 339 positions, of which 129 employees had
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been terminated as of December 31, 1998. In addition, contract terminations and
lease cancellations resulted in losses of approximately $4.1 million and $3.4
million, respectively. During 1998, the Company made payments of approximately
$1.6 million related to this restructuring initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, of which $19.7 million relating to the Company's accident and health
assumed reinsurance pool business has been utilized as of December 31, 1998.
These pools consist primarily of the Corporate Risk Management Services
segment's assumed stop loss business, small group managed care pools, long-term
disability and long-term care pools, student accident and special risk business.
The agreement is consistent with management's decision to exit this line of
business, which the Company expects to run-off over the next three years. As a
result of this transaction, the Company recognized a $25.3 million pre-tax loss
in the third quarter of 1998.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on its results of operations or financial position.
In 1998 and 1997, Allmerica P&C redeemed 3,289.5 and 5,735.3 shares,
respectively, of its issued and outstanding common stock owned by AFC for $125.0
million and $195.0 million, respectively, thereby increasing FAFLIC's ownership
of Allmerica P&C by 4.3% and 6.3%, respectively. The 1998 transaction consisted
of $124.0 million of securities and $1.0 million of cash. The 1997 transaction
consisted of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly.
The merger has been accounted for as a purchase. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million funded a portion of the acquisition of
the 24.2 million publicly-held shares of Allmerica P&C pursuant to the merger on
July 16, 1997.
The Company's consolidated results of operations include minority interest in
Allmerica P&C prior to July 16, 1997. The unaudited pro forma information below
presents consolidated results of operations as if the merger and issuance of
Capital Securities had occurred at the beginning of 1996 and reflects
adjustments which include interest expense related to the assumed financing of a
portion of the cash consideration paid and amortization of goodwill.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the merger
and issuance of Capital Securities occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,362.7 $3,246.4
======== ========
Net realized capital gains included in revenue.............. $ 63.0 $ 46.7
======== ========
Income before taxes and minority interest................... 353.0 311.6
Income taxes................................................ (89.6) (68.7)
Minority Interest:
Equity in earnings...................................... (75.5) (67.3)
-------- --------
Net income.................................................. $ 187.9 $ 175.6
======== ========
</TABLE>
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions................. 2,408.9 83.0 5.2 2,486.7
Foreign governments............................... 107.9 7.7 4.5 111.1
Corporate fixed maturities........................ 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities........................ 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities............................ $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities................................. $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions................. 2,200.6 78.3 3.1 2,275.8
Foreign governments............................... 110.8 8.5 2.2 117.1
Corporate fixed maturities........................ 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities........................ 374.5 9.7 2.0 382.2
-------- ------ ------ --------
Total fixed maturities............................ $6,992.8 $281.1 $ 20.4 $7,253.5
======== ====== ====== ========
Equity securities................................. $ 341.1 $141.9 $ 4.0 $ 479.0
======== ====== ====== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license 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,
1998, the amortized cost and market value of assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.4 million and $105.1 million were on
deposit with various state and governmental authorities at December 31, 1998 and
1997, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
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.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 384.7 $ 391.5
Due after one year through five years....................... 2,309.4 2,341.2
Due after five years through ten years...................... 2,173.3 2,199.6
Due after ten years......................................... 2,653.4 2,751.6
-------- --------
Total....................................................... $7,520.8 $7,683.9
======== ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary 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, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------- --------------- -------- --------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 993.3 $18.2 $11.9
Equity securities........................................... $ 276.4 $76.3 $ 9.6
1997
Fixed maturities............................................ $1,894.8 $27.6 $16.2
Equity securities........................................... $ 145.5 $55.8 $ 1.3
1996
Fixed maturities............................................ $2,432.8 $19.3 $30.5
Equity securities........................................... $ 228.1 $56.1 $ 1.3
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year........................ $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens...................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest.................................................. 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year.............................. $ 79.0 $ 90.2 $169.2
====== ====== ======
1997
Net appreciation, beginning of year........................ $ 71.3 $ 60.1 $131.4
------ ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................ 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest.................................................. (65.9) (27.1) (93.0)
------ ------ ------
51.3 26.6 77.9
------ ------ ------
Net appreciation, end of year.............................. $122.6 $ 86.7 $209.3
====== ====== ======
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1996
Net appreciation, beginning of year........................ $108.7 $ 44.3 $153.0
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest.................................................. 33.6 (20.1) 13.5
------ ------ ------
(37.4) 15.8 (21.6)
------ ------ ------
Net appreciation, end of year.............................. $ 71.3 $ 60.1 $131.4
====== ====== ======
</TABLE>
(1) Includes net appreciation on other investments of $0.8 million, $1.8
million, and $0.6 million in 1998, 1997, and 1996, respectively.
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) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Mortgage loans.............................................. $562.3 $567.5
Real estate held for sale................................... 20.4 50.3
------ ------
Total mortgage loans and real estate........................ $582.7 $617.8
====== ======
</TABLE>
Reserves for mortgage loans were $11.5 million and $20.7 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there were 7 properties
remaining in the Company's portfolio, which are being actively marketed. As a
result of the plan, during 1997 real estate assets with a carrying amount of
$54.7 million were written down to the estimated fair value less cost of
disposal of $50.3 million, and a net realized investment loss of $4.4 million
was recognized. Depreciation is not recorded on these assets while they are held
for disposal. There were no non-cash investing activities, including real estate
acquired through foreclosure of mortgage loans, in 1998 and 1997. During 1996,
non-cash investing activities included real estate acquired through foreclosure
of mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Property type:
Office building........................................... $304.4 $265.1
Residential............................................... 52.8 66.6
Retail.................................................... 108.5 132.8
Industrial/warehouse...................................... 110.0 107.2
Other..................................................... 18.5 66.8
Valuation allowances...................................... (11.5) (20.7)
------ ------
Total....................................................... $582.7 $617.8
====== ======
Geographic region:
South Atlantic............................................ $136.1 $173.4
Pacific................................................... 155.1 152.8
East North Central........................................ 80.5 102.0
Middle Atlantic........................................... 61.2 73.8
West South Central........................................ 54.7 34.9
New England............................................... 60.7 46.9
Other..................................................... 45.9 54.7
Valuation allowances...................................... (11.5) (20.7)
------ ------
Total....................................................... $582.7 $617.8
====== ======
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $84.7 million; 2000 -- $131.6 million; 2001 -- $33.9 million; 2002 -- $28.4
million; 2003 -- $42.5 million; and $241.2 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 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
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, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1998
Mortgage loans................................... $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
1997
Mortgage loans................................... $19.6 $ 2.5 $ 1.4 $20.7
Real estate...................................... 14.9 6.0 20.9 --
----- ----- ----- -----
Total........................................ $34.5 $ 8.5 $22.3 $20.7
===== ===== ===== =====
1996
Mortgage loans................................... $33.8 $ 5.5 $19.7 $19.6
Real estate...................................... 19.6 -- 4.7 14.9
----- ----- ----- -----
Total........................................ $53.4 $ 5.5 $24.4 $34.5
===== ===== ===== =====
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $20.9 million to the investment valuation allowance related to
real estate in 1997 primarily reflect write downs to the estimated fair value
less costs to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $22.0 million and $30.5 million, with
related reserves of $6.0 million and $13.8 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $26.1 million, $30.8 million
and $50.4 million, with related interest income while such loans were impaired
of $3.2 million, $3.2 million and $5.8 million as of December 31, 1998, 1997 and
1996, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. Futures contract
activity increased significantly in 1998 due to the increase in sale of GICs.
The Company's exposure to credit risk under futures contracts is limited to the
margin deposited with the broker. The Company only trades futures contracts with
nationally recognized brokers, which the Company believes have adequate capital
to ensure that there is minimal danger of default. The Company does not require
collateral or other securities to support financial instruments with credit
risk.
The notional amount of futures contracts outstanding at December 31, 1998 was
$92.7 million. There were no futures contracts outstanding at December 31, 1997.
The notional amounts of the contracts represent the extent of the Company's
investment but not the future cash requirements, as the Company generally
settles open positions prior to maturity. The maturity of all futures contracts
outstanding is less than one year. The fair value of futures contracts
outstanding was $92.5 million at December 31, 1998.
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. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging gains (losses) were $(1.8) million in 1998. There were no deferred
hedging gains or losses in 1997. Gains and losses on hedge contracts that are
deemed ineffective by the Company are realized immediately. There were
$0.1 million of gains realized on ineffective hedges in 1998. There was no gain
or loss in 1997 or 1996.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- --------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ -- $(33.0) $ 74.7
New contracts............................................... 1,117.5 (0.2) (1.1)
Contracts terminated........................................ (1,024.8) 33.2 (106.6)
--------- ------ -------
Contracts outstanding, end of year.......................... $ 92.7 $-- $ (33.0)
========= ====== =======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities. Interest
and principal related to foreign fixed income securities payable in foreign
currencies, at current exchange rates, are exchanged for the equivalent payment
in U.S dollars translated at a specific currency exchange rate. The primary risk
associated with these transactions is
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the inability of the counterparty to meet its obligation. The Company regularly
assesses the financial strength of its counterparties and generally enters into
forward or swap agreements with counterparties rated "A" or better by nationally
recognized rating agencies. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange, as indicated by the fair value of the contract. The fair values
of the foreign currency swap contracts outstanding were $1.2 million and
$1.3 million at December 31, 1998 and 1997, respectively. Changes in the fair
value of contracts are reported as an unrealized gain or loss, consistent with
the underlying hedged security. The Company does not require collateral or other
security to support financial instruments with credit risk.
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 1998, 1997 and 1996. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1998 or 1997.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $42.6 $ 47.6 $ 69.4
New contracts............................................... -- 5.0 --
Contracts expired........................................... -- (10.0) (21.8)
----- ------ ------
Contracts outstanding, end of year.......................... $42.6 $ 42.6 $ 47.6
===== ====== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at December
31, 1998 are $24.0 million in 1999, $8.3 million in 2000 and $10.3 million
thereafter. There are no expected maturities of such foreign currency swap
contracts in 2001, 2002 and 2003.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. The use of interest rate swap contracts increased during 1998
due to the increase in floating rate GIC liabilities. As with foreign currency
swap contracts, the primary risk associated with these transactions is the
inability of the counterparty to meet its obligation. The Company regularly
assesses the financial strength of its counterparties and generally enters into
forward or swap agreements with counterparties rated "A" or better by nationally
recognized rating agencies. Because the underlying principal of swap contracts
is not exchanged, the Company's maximum exposure to counterparty credit risk is
the difference in payments exchanged, which at December 31, 1998 was a net
payable of $3.9 million. The Company does not require collateral or other
security to support financial instruments with credit risk.
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(2.8)
million, $(0.4) million and $0.6 million for the years ended December 31, 1998,
1997, and 1996, respectively. The fair value of interest rate swap contracts
outstanding were $(28.3) million and $(2.3) million at December 31, 1998 and
1997, respectively. Changes in the fair value of contracts are reported as an
unrealized gain or loss, consistent with the underlying hedged security. Any
gain or loss on the termination of interest rate swap contracts accounted for as
hedges are deferred and recognized with the gain or loss on the
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged transaction. The Company had no deferred gain or loss on interest rate
swap contracts in 1998 or 1997. A reconciliation of the notional amount of
interest rate swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 244.1 $ 5.0 $ 17.5
New contracts............................................... 873.5 244.7 5.0
Contracts expired........................................... (5.0) (5.6) (17.5)
-------- ------ ------
Contracts outstanding, end of year.......................... $1,112.6 $244.1 $ 5.0
======== ====== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1998 is $44.0 million in 2000, $234.5 million in 2002, $810.5 million in 2003
and $23.6 million thereafter. There are no expected maturities of interest rate
contracts in 1999 or 2001.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked and insurance portfolio-linked
swap contracts for investment purposes. Under the security return-linked
contracts, the Company agrees to exchange cash flows according to the
performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1998, was not material to the Company.
The Company does not require collateral or other security to support financial
instruments with credit risk.
In 1998, the Company also entered into credit default swap agreements. Under the
terms of these agreements, the Company assumes the default risk of a specific
high credit quality issuer in exchange for a stated annual premium. In the case
of default, the Company will pay the counterparty par value for a pre-determined
security of the issuer. The primary risk associated with these transactions is
the default risk of the underlying companies. The Company regularly assesses the
financial strength of the underlying companies and generally enters into default
swap agreements for companies rated "A" or better by nationally recognized
rating agencies.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.1) million at
December 31, 1998 and 1997. The net amount receivable or payable under
security-returned-linked and insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net increase (decrease)
in realized investment gains related to these contracts was $1.1 million in 1998
and $(1.6) million in 1997. There were no realized investment gains or losses on
other swap contracts recognized in 1996.
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.2 million in 1998. There was no
investment income recognized in 1997 and 1996.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 15.0 $ 58.6 $--
New contracts............................................... 266.3 192.1 58.6
Contracts expired........................................... (26.3) (211.6) --
Contracts terminated........................................ -- (24.1) --
------ ------- -----
Contracts outstanding, end of year.......................... $255.0 $ 15.0 $58.6
====== ======= =====
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1998 are
as follows: $115.0 million in 1999, $115.0 million in 2000 and $25.0 million in
2001. There are no expected maturities of such other swap contracts in 2002 or
2003.
H. OTHER
At December 31, 1998, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity. At December 31, 1997, FAFLIC had
no concentration of investments in a single investee exceeding 10% of
shareholder's equity, except for investments with the U.S. Treasury with a
carrying value of $262.4 million.
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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $530.8 $541.9 $553.8
Mortgage loans.............................................. 58.3 57.5 69.5
Equity securities........................................... 7.4 10.6 11.1
Policy loans................................................ 11.9 10.9 10.3
Real estate................................................. 7.2 20.1 40.8
Other long-term investments................................. (0.5) 12.4 19.9
Short-term investments...................................... 14.3 12.8 10.6
------ ------ ------
Gross investment income..................................... 629.4 666.2 716.0
Less investment expenses.................................... (15.7) (24.4) (45.2)
------ ------ ------
Net investment income....................................... $613.7 $641.8 $670.8
====== ====== ======
</TABLE>
At December 31, 1998, there was one mortgage loan on non-accrual status which
had an outstanding principal balance of $4.3 million. This loan was restructured
and fully impaired. There were no fixed maturities which were on non-accrual
status at December 31, 1998. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investments, had no impact in 1998 and 1997, and reduced net income by $0.5
million in 1996.
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 $28.7 million, $40.3 million and $51.3 million at
December 31, 1998, 1997 and 1996, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $3.3 million, $3.9 million and $7.7 million in
1998, 1997 and 1996, respectively. Actual interest income on
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these loans included in net investment income aggregated $3.3 million,
$4.2 million and $4.5 million in 1998, 1997 and 1996, respectively.
There were no fixed maturities which were non-income producing for the year
ended December 31, 1998. There was one mortgage loan which was non-income
producing for the year ended December 31, 1998, which had an outstanding
principal balance of $4.3 million and was fully impaired.
Included in other long-term investments is a loss from limited partnerships of
$7.5 million in 1998, and income of $7.8 million and $13.7 million in 1997 and
1996, respectively.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $(11.8) $14.7 $(9.7)
Mortgage loans.............................................. 8.8 (1.2) (2.4)
Equity securities........................................... 66.6 53.6 54.8
Real estate................................................. 13.7 12.8 21.1
Other....................................................... (14.7) (3.4) 3.0
------ ----- -----
Net realized investment gains............................... $ 62.6 $76.5 $66.8
====== ===== =====
</TABLE>
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period, (net of
taxes and minority interest of $(20.8) million,
$123.7 million and $10.7 million in 1998, 1997 and 1996,
respectively).............................................. $ (6.8) $115.5 $ (0.7)
Less: reclassification adjustment for gains included in net
income (net of taxes and minority interest of
$21.5 million, $30.7 million and $24.2 million in 1998,
1997 and 1996, respectively)............................... 33.3 37.6 20.9
------ ------ ------
Other comprehensive income.................................. $(40.1) $ 77.9 $(21.6)
====== ====== ======
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement 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 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. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $(27.1) million at December 31,
1998. Fair values of interest rate futures were not material at December 31,
1997.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents....................... $ 504.0 $ 504.0 $ 213.9 $ 213.9
Fixed maturities................................ 7,683.9 7,683.9 7,253.5 7,253.5
Equity securities............................... 397.1 397.1 479.0 479.0
Mortgage loans.................................. 562.3 587.1 567.5 597.0
Policy loans.................................... 154.3 154.3 141.9 141.9
-------- -------- -------- --------
$9,301.6 $9,326.4 $8,655.8 $8,685.3
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts................. $1,791.8 $1,830.8 $ 985.2 $1,004.7
Supplemental contracts without life
contingencies................................. 37.3 37.3 22.4 22.4
Dividend accumulations.......................... 88.4 88.4 87.8 87.8
Other individual contract deposit funds......... 61.6 61.1 57.9 55.7
Other group contract deposit funds.............. 700.4 704.0 714.8 715.5
Individual annuity contracts.................... 1,110.6 1,073.6 907.4 882.2
Short-term debt................................. 221.3 221.3 33.0 33.0
Long-term debt.................................. -- -- 2.6 2.6
-------- -------- -------- --------
$4,011.4 $4,016.5 $2,811.1 $2,803.9
======== ======== ======== ========
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1998, 1997
and 1996 is a net pre-tax contribution from the Closed Block of $10.4 million,
$9.1 million and $8.6 million, respectively. Summarized financial information of
the Closed Block as of December 31, 1998 and 1997 and for the period ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $399.1
and $400.1, respectively)............................... $414.2 $412.9
Mortgage loans............................................ 136.0 112.0
Policy loans.............................................. 210.9 218.8
Cash and cash equivalents................................. 9.4 25.1
Accrued investment income................................. 14.1 14.1
Deferred policy acquisition costs......................... 15.6 18.2
Other assets.............................................. 2.9 5.6
------ ------
Total assets................................................ $803.1 $806.7
====== ======
Liabilities
Policy liabilities and accruals........................... $862.9 $875.1
Other liabilities......................................... 9.1 10.4
------ ------
Total liabilities........................................... $872.0 $885.5
====== ======
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Revenues
Premiums................................................ $ 55.4 $ 58.3 $ 61.7
Net investment income................................... 53.3 53.4 52.6
Realized investment loss................................ 0.1 1.3 (0.7)
------- ------- -------
Total revenues.............................................. 108.8 113.0 113.6
Benefits and expenses
Policy benefits......................................... 95.0 100.5 101.2
Policy acquisition expenses............................. 2.7 3.0 3.2
Other operating expenses................................ 0.7 0.4 0.6
------- ------- -------
Total benefits and expenses................................. 98.4 103.9 105.0
------- ------- -------
Contribution from the Closed Block.......................... $ 10.4 $ 9.1 $ 8.6
======= ======= =======
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block...................... $ 10.4 $ 9.1 $ 8.6
Change in deferred policy acquisition costs, net........ 2.6 2.9 3.4
Change in premiums and other receivables................ 0.3 -- 0.2
Change in policy liabilities and accruals............... (13.5) (11.6) (13.9)
Change in accrued investment income..................... -- 0.2 2.3
Deferred Taxes.......................................... 0.1 (5.1) 1.0
Change in other assets.................................. 2.4 (2.9) (1.6)
Change in expenses and taxes payable.................... (2.9) (2.0) 1.7
Other, net.............................................. (0.1) (1.2) 1.4
------- ------- -------
Net cash (used in) provided by operating activities....... (0.7) (10.6) 3.1
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 83.6 161.6 188.1
Purchases of investments................................ (106.5) (161.4) (196.9)
Other, net.............................................. 7.9 11.4 12.2
------- ------- -------
Net cash provided by (used in) investing activities....... (15.0) 11.6 3.4
------- ------- -------
Net increase in cash and cash equivalents................... (15.7) 1.0 6.5
Cash and cash equivalents, beginning of year................ 25.1 24.1 17.6
------- ------- -------
Cash and cash equivalents, end of year...................... $ 9.4 $ 25.1 $ 24.1
======= ======= =======
</TABLE>
There are no valuation allowances on mortgage loans in the Closed Block at
December 31, 1998, 1997 or 1996, respectively.
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.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Short and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Short-Term
Commercial paper........................................ $ 41.3 $32.6
Borrowings under bank credit facility................... 150.0 --
Repurchase agreements................................... 30.0 --
Other................................................... -- 0.4
------ -----
Total short-term debt....................................... $221.3 $33.0
====== =====
Long-term debt.............................................. $ -- $ 2.6
====== =====
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1998, the weighted average
interest rate for outstanding commercial paper was approximately 5.34%.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million.
During 1998 and 1996, the Company utilized repurchase agreements to finance
certain investments. The 1996 repurchase agreements were settled by the end of
1996.
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 and
APY. Interest expense was $7.3 million, $3.6 million and $16.8 million in 1998,
1997 and 1996, respectively. Interest paid on the credit agreement was
approximately $0.7 million in 1998 and $2.8 million in 1997. Interest expense
during 1996 also included $11.0 million related to interest payments on
repurchase agreements. All interest expense is recorded in other operating
expenses.
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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................. $ 67.6 $83.3 $ 96.8
Deferred................................................ (15.4) 14.2 (15.7)
------ ----- ------
Total....................................................... $ 52.2 $97.5 $ 81.1
====== ===== ======
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Expected federal income tax expense......................... $100.9 $131.8 $122.3
Tax-exempt interest..................................... (38.9) (37.9) (35.3)
Differential earnings amount............................ -- -- (10.2)
Dividend received deduction............................. (5.1) (3.2) (1.6)
Changes in tax reserve estimates........................ 2.3 7.8 4.7
Tax credits............................................. (8.5) (2.7)
Other, net.............................................. 1.5 1.7 1.2
------ ------ ------
Federal income tax expense.................................. $ 52.2 $ 97.5 $ 81.1
====== ====== ======
</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). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards....................................... $ (16.8) $ (15.6)
Loss reserve discounting................................ (406.6) (391.6)
Deferred acquisition costs.............................. 345.8 291.8
Employee benefit plans.................................. (45.3) (48.0)
Investments, net........................................ 121.7 175.4
Bad debt reserve........................................ (1.8) (14.3)
Litigation reserve...................................... (10.9) --
Other, net.............................................. (5.5) 15.2
------- -------
Deferred tax (asset) liability, net......................... $ (19.4) $ 12.9
======= =======
</TABLE>
Gross deferred income tax assets totaled $486.9 million and $469.5 million at
December 31, 1998 and 1997, respectively. Gross deferred income tax liabilities
totaled $467.5 million and $482.4 million at December 31, 1998 and 1997,
respectively.
The Company believes, based on the its 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, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1998, there are available alternative
minimum tax credit carryforwards of $16.8 million.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1994. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1992,1993 and 1994 for the
FAFLIC/AFLIAC consolidated group. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/ AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company'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
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1998, 1997 and 1996 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. 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.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.0 $ 19.9 $ 19.0
Interest cost............................................... 25.5 23.5 21.9
Expected return on plan assets.............................. (34.9) (31.2) (28.3)
Recognized net actuarial loss (gain)........................ 0.4 0.1 (0.4)
Amortization of transition asset............................ (1.8) (1.9) (1.9)
Amortization of prior service cost.......................... (1.7) (2.0) (2.3)
------ ------ ------
Net periodic pension cost................................... $ 6.5 $ 8.4 $ 8.0
====== ====== ======
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the status of the pension plan. At December 31,
1998 and 1997 the plan's assets exceeded its projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year....... $370.4 $344.2
Service cost -- benefits earned during the year......... 19.0 19.9
Interest cost........................................... 25.5 23.5
Actuarial losses........................................ 20.4 0.3
Benefits paid........................................... (21.1) (17.5)
------ ------
Projected benefit obligation at end of year............. $414.2 $370.4
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.......... $395.5 $347.8
Actual return on plan assets............................ 67.2 65.2
Benefits paid........................................... (21.1) (17.5)
------ ------
Fair value of plan assets at end of year................ 441.6 395.5
------ ------
Funded status of the plan............................... 27.4 25.1
Unrecognized transition obligation...................... (23.9) (26.2)
Unamortized prior service cost.......................... (11.0) (13.9)
Unrecognized net actuarial gains........................ (54.9) (44.9)
------ ------
Net pension liability............................... $(62.4) $(59.9)
====== ======
</TABLE>
As a result of AFC's merger with APY, certain pension liabilities were reduced
by $11.7 million in 1997, to reflect their fair value as of the purchase date.
These pension liabilities were reduced by $10.3 million in 1998, which reflects
fair value, net of applicable amortization. Determination of the projected
benefit obligations was based on a weighted average discount rate of 6.5% and
7.0% in 1998 and 1997, respectively, and the assumed long-term rate of return on
plan assets was 9.0% in both 1998 and 1997. The actuarial present value of the
projected benefit obligations was determined using assumed rates of increase in
future compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. Plan
assets also include 973,262 shares of AFC Common Stock at both December 31, 1998
and 1997, with a market value of $56.3 million and $48.6 million at
December 31, 1998 and 1997, respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1998, 1997 and
1996, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expenses related to this plan was $5.6 million, $3.3
million and $5.5 million, in 1998, 1997 and 1996, respectively. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The Plan expense in 1998, 1997 and 1996 was $3.0 million, $2.8
million and $2.0 million, respectively.
On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $5.9 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at
beginning of year..................................... $ 71.8 $ 72.3
Service cost............................................ 3.1 3.0
Interest cost........................................... 5.1 4.6
Actuarial losses........................................ 7.6 (4.7)
Benefits paid........................................... (3.6) (3.4)
------ ------
Accumulated postretirement benefit obligation at end of
year.................................................. 84.0 71.8
Fair value of plan assets at end of year................ -- --
------ ------
Funded status of the plan............................... (84.0) (71.8)
Unamortized prior service cost.......................... (12.9) (15.3)
Unrecognized net actuarial losses....................... 7.5 0.8
------ ------
Accumulated postretirement benefit costs................ $(89.4) $(86.3)
====== ======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 3.1 $ 3.0 $ 3.2
Interest cost............................................... 5.1 4.6 4.6
Recognized net actuarial loss (gain)........................ 0.1 (0.1) 0.2
Amortization of prior service cost.......................... (2.4) (2.7) (3.0)
----- ----- -----
Net periodic postretirement benefit cost.................... $ 5.9 $ 4.8 $ 5.0
===== ===== =====
</TABLE>
As a result of AFC's merger with APY in 1997, certain postretirement liabilities
were reduced by $6.1 million to reflect their fair value as of the purchase
date. These postretirement liabilities were reduced by $5.4 million in 1998,
which reflects fair value, net of applicable amortization.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1998, health care costs were assumed to increase 7.0% in 1999,
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, 1998
by $5.7 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1998 by $0.7 million.
Conversely, decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation at December 31, 1998 by $5.2 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1998 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% and 7.0% at December 31, 1998 and
1997. In addition, the actuarial present value of the accumulated postretirement
benefit obligation was determined using an assumed rate of increase in future
compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the aforementioned postretirement
medical and death benefits plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $3.8 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
11. 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.
Dividends from FAFLIC and Allmerica P&C (Hanover) are the primary source of cash
flow for AFC.
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. During 1998, FAFLIC paid dividends of
$50.0 million to AFC. No dividends were declared by FAFLIC to AFC during 1997 or
1996 During 1999, FAFLIC could pay dividends of $116.4 million to AFC without
prior approval of the Commissioner.
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 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. No dividends were declared by AFLIAC to FAFLIC during
1998, 1997 or 1996. During 1999, AFLIAC could pay dividends of $26.1 million to
FAFLIC without prior approval.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Hanover declared dividends to Allmerica P&C totaling, $125.0 million, $120.0
million and $105.0 million during 1998, 1997 and 1996, respectively. During
1999, the maximum dividend and other distributions that could be paid to
Allmerica P&C by Hanover, without prior approval of the Insurance Commissioner,
is approximately $1.6 million, which considers an extraordinary dividend of
$125.0 million declared on March 12, 1998. The allowable dividend without prior
approval will increase to $126.6 million on March 12, 1999.
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. Citizens Insurance paid dividends to Citizens Corporation
totaling $200.0 million and $6.3 million during 1998 and 1996, respectively. A
$180.0 million extraordinary dividend was approved by the Commissioner in 1998.
No dividends were declared by Citizens Insurance during 1997. During 1999,
Citizens Insurance can declare no dividends to Citizens Corporation without
prior approval of the Michigan Insurance Commissioner as a result of the $180.0
million extraordinary dividend declared on December 21, 1998.
12. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in four operating segments.
Effective January 1, 1998, the Company adopted Statement No. 131. Upon adoption,
the separate financial information of each segment was re-defined consistent
with the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. A
summary of the significant changes in reportable segments is included below.
The Risk Management group includes two segments: Property and Casualty and
Corporate Risk Management Services. The 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 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 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 Accumulation group includes two segments: Allmerica
Financial Services and Allmerica Asset Management. The Allmerica Financial
Services segment includes variable annuities, variable universal life and
traditional life insurance products distributed via retail channels as well as
group retirement products, such as defined benefit and 401(k) plans and
tax-sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing in
three types of GICs; the traditional GIC, the synthetic GIC and the floating
rate GIC. This segment is also a Registered Investment Advisor providing
investment advisory services, primarily to affiliates, and to other
institutions, such as insurance companies and pension plans. In addition to the
four operating segments, the Company has a Corporate segment, which consists
primarily of cash, investments, corporate debt, Capital Securities and corporate
overhead expenses. Corporate overhead expenses reflect costs not attributable to
a
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
particular segment, such as those generated by certain officers and directors,
Corporate Technology, Corporate Finance, Human Resources and the legal
department.
Significant changes to the Company's segmentation include a reclassification of
corporate overhead expenses from each operating segment into the Corporate
segment. Additionally, certain products (group retirement products, such as
401(k) plans and tax-sheltered annuities, group variable universal life) and
certain other non-insurance operations (telemarketing and trust services)
previously reported in the Allmerica Financial Institutional Services segment
were combined with the Allmerica Financial Services segment. Also, the Company
reclassified the GIC product line previously reported in the Allmerica Financial
Institutional Services segment into the Allmerica Asset Management segment.
Management evaluates the results of the aforementioned segments based on pre-tax
segment income. Pre-tax segment income is determined by adjusting net income for
net realized investment gains and losses, net gains and losses on disposals of
businesses, extraordinary items, the cumulative effect of accounting changes and
certain other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of pre-tax segment income enhances its
understanding of the Company's results of operations by highlighting net income
attributable to the normal, recurring operations of the business. However,
pre-tax segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management
Property and Casualty................................... $2,204.8 $2,211.0 $2,145.8
Corporate Risk Management Services...................... 412.9 405.4 370.7
-------- -------- --------
Subtotal............................................ 2,617.7 2,616.4 2,516.5
-------- -------- --------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 721.2 709.7 700.0
Allmerica Asset Management.............................. 121.7 91.1 110.5
-------- -------- --------
Subtotal............................................ 842.9 800.8 810.5
-------- -------- --------
Corporate................................................. 2.3 5.5 5.2
Intersegment revenues..................................... (7.6) (11.6) (13.8)
-------- -------- --------
Total segment revenues including Closed Block........... 3,455.2 3,411.1 3,318.4
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block............................. (98.4) (102.6) (105.7)
Net realized gains...................................... 62.6 75.6 66.8
-------- -------- --------
Total revenues...................................... $3,419.4 $3,384.2 $3,279.5
======== ======== ========
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment income (loss) before income taxes and minority
interest:
Risk Management
Property and Casualty................................... $151.4 $172.9 $170.7
Corporate Risk Management Services...................... 7.8 27.0 28.3
------ ------ ------
Subtotal............................................ 159.2 199.9 199.0
------ ------ ------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 166.6 134.6 106.8
Allmerica Asset Management.............................. 23.7 18.4 11.5
------ ------ ------
Subtotal............................................ 190.3 153.0 118.3
------ ------ ------
Corporate................................................. (45.3) (44.6) (36.6)
------ ------ ------
Segment income before income taxes and minority
interest.............................................. 304.2 308.3 280.7
------ ------ ------
Adjustments to segment income:
Net realized investment gains, net of amortization...... 53.9 78.7 69.6
Sales practice litigation expense....................... (31.0) -- --
Loss on exiting reinsurance pools....................... (25.3)
Gain from change in mortality assumptions............... -- 47.0 --
Loss on cession of disability income business........... -- (53.9) --
Restructuring costs..................................... (13.0) -- --
Other items............................................. (.7) (3.2) (1.1)
------ ------ ------
Income before taxes and minority interest................. $288.1 $376.9 $349.2
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997 1998 1997
- ------------- --------- --------- --------- ---------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION
COSTS
<S> <C> <C> <C> <C>
Risk Management
Property and Casualty......................... $ 5,649.0 $ 5,650.4 $ 164.9 $167.2
Corporate Risk Management Services............ 567.8 619.8 2.6 2.9
--------- --------- -------- ------
Subtotal.................................. 6,216.8 6,270.2 167.5 170.1
Retirement and Asset Accumulation
Allmerica Financial Services.................. 19,407.3 15,159.2 993.1 794.5
Allmerica Asset Management.................... 1,810.9 1,035.1 0.6 0.9
--------- --------- -------- ------
Subtotal.................................. 21,218.2 16,194.3 993.7 795.4
Corporate..................................... 29.6 26.9 -- --
--------- --------- -------- ------
Total..................................... $27,464.6 $22,491.4 $1,161.2 $965.5
========= ========= ======== ======
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $34.9 million, $33.6 million and $34.9 million in 1998, 1997 and
1996, respectively. At December 31, 1998, future minimum rental payments under
non-cancelable operating leases were approximately $73.5 million, payable as
follows: 1999 -- $28.6 million; 2000 -- $21.0 million; 2001 -- $13.8 million;
2002 -- $6.9 million; and $3.2 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1999.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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, "Accounting and
Reporting for Reinsurance of Short Duration and Long Duration Contracts".
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 Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1998, CAR was the only reinsurer 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 1998, 1997 and 1996 were
$34.3 million and $38.1 million, $32.3 million and $28.2 million, and $38.0
million and $21.8 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1998, 1997 and 1996 of $3.7
million and $18.0 million, $9.8 million and $(0.8) million, and $50.5 million
and $(52.9) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
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.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................. $ 416.6 $ 417.4 $ 389.1
Assumed................................................. 111.9 110.7 87.8
Ceded................................................... (189.8) (170.1) (138.9)
-------- -------- --------
Net premiums................................................ $ 338.7 $ 358.0 $ 338.0
======== ======== ========
Property and casualty premiums written:
Direct.................................................. $1,969.3 $2,068.5 $2,039.7
Assumed................................................. 58.8 103.1 108.7
Ceded................................................... (74.1) (179.8) (234.0)
-------- -------- --------
Net premiums................................................ $1,954.0 $1,991.8 $1,914.4
======== ======== ========
Property and casualty premiums earned:
Direct.................................................. $1,966.8 $2,046.2 $2,018.5
Assumed................................................. 64.5 102.0 112.4
Ceded................................................... (66.1) (195.1) (232.6)
-------- -------- --------
Net premiums................................................ $1,965.2 $1,953.1 $1,898.3
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................. $ 653.6 $ 656.4 $ 606.5
Assumed................................................. 67.9 61.6 44.9
Ceded................................................... (164.0) (158.8) (77.8)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 557.5 $ 559.2 $ 573.6
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................. $1,588.3 $1,464.9 $1,299.8
Assumed................................................. 62.7 101.2 85.8
Ceded................................................... (158.2) (120.6) (2.2)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses................................................... $1,492.8 $1,445.5 $1,383.4
======== ======== ========
</TABLE>
15. DEFERRED POLICY ACQUISITION COSTS
The following reflects changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 965.5 $ 822.7 $ 735.7
Acquisition expenses deferred........................... 641.2 617.7 547.4
Amortized to expense during the year.................... (452.8) (476.0) (470.1)
Adjustment to equity during the year.................... 7.3 (11.1) 9.7
Adjustment for cession of disability income insurance... -- (38.6) --
Adjustment for revision of universal and variable
universal life insurance mortality assumptions........ -- 50.8 --
-------- ------- -------
Balance at end of year...................................... $1,161.2 $ 965.5 $ 822.7
======== ======= =======
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND
LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of 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 recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$568.0 million, $533.6 million and $471.7 million at December 31, 1998, 1997 and
1996, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were increased by $14.6 million in 1998, and decreased by
$0.2 million and $0.6 million in 1997 and 1996, respectively. The increase in
1998 resulted from the Company's reserve strengthening primarily in the assumed
reinsurance and stop loss only 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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,615.4 $2,744.1 $2,896.0
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year........ 1,609.0 1,564.1 1,513.3
Decrease in provision for insured events of prior
years................................................. (127.2) (127.9) (141.4)
-------- -------- --------
Total incurred losses and LAE............................... 1,481.8 1,436.2 1,371.9
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................. 871.9 775.1 759.6
Losses and LAE attributable to insured events of prior
years................................................. 643.0 732.1 627.6
-------- -------- --------
Total payments.............................................. 1,514.9 1,507.2 1,387.2
-------- -------- --------
Change in reinsurance recoverable on unpaid losses.......... 15.0 (50.2) (136.6)
-------- -------- --------
Other (1)................................................... -- (7.5) --
-------- -------- --------
Reserve for losses and LAE, end of year..................... $2,597.3 $2,615.4 $2,744.1
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.2 million,
$127.9 million and $141.1 million in 1998, 1997, and 1996, respectively.
The decrease in favorable development on prior years' reserves of $0.7 million
in 1998 results from a $20.7 million decrease in favorable development at
Citizens, significantly offset by a $20.0 million increase in favorable
development at Hanover. The decrease in favorable development on prior year
reserves at Citizens in 1998, reflects a $13.8 million decrease in favorable
development, to $21.9 million, in the workers' compensation line. In addition,
favorable development in the commercial multiple peril line decreased $4.0
million, to
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$0.3 million. These declines in favorable development are partially offset by
continued favorable development on prior year reserves in the personal
automobile line due to tort reform in Michigan, which became effective July 26,
1996. The new legislation requires judges rather than juries to determine if the
minimum threshold to allow pain and suffering damage settlements has been met.
The increase in favorable development at Hanover during 1998 reflects a $20.6
million increase in favorable development on prior year reserves, to $38.0
million, in the personal automobile line, as well as a $14.9 million increase to
$12.1 million in the commercial multiple peril line. These increases are
primarily attributable to the initiatives taken by the Company over the past two
years which are expected to reduce ultimate settlement costs. These increases
are partially offset by less favorable development in the workers' compensation
line where favorable development on prior year reserves decreased
$19.2 million, to $9.6 million.
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million, in the personal automobile line
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million, in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997, reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million, and in the commercial multiple peril line where favorable
development increased $7.0 million, to $4.3 million. These increases are
partially offset by less favorable development in the personal automobile line,
where favorable development decreased $10.5 million, to $22.5 million in 1997.
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 the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $49.9
million, $53.1 million and $50.8 million, net of reinsurance of $14.2 million,
$15.7 million and $20.2 million in 1998, 1997 and 1996, respectively. The
Regional Property and Casualty subsidiaries do not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Regional Property and
Casualty subsidiaries may be required to defend such claims. The Company
estimated its ultimate liability for these claims based upon currently known
facts, reasonable assumptions where the facts are not known, current law and
methodologies currently available. 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 Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims are adequate. In addition, the
Company is not aware of any litigation or pending claims that may result in
additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
17. MINORITY INTEREST
The Company's interest in Allmerica P&C is represented by ownership of 70.0%,
65.8% and 59.5% of the outstanding shares of common stock at December 31, 1998,
1997 and 1996, respectively. Earnings and
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholder's equity attributable to minority shareholders are included in
minority interest in the consolidated financial statements.
18. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may 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
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement, to which the court granted preliminary
approval on December 4, 1998. A hearing was held on March 19, 1999 to consider
final approval of the settlement agreement. A decision by the court is expected
to be rendered in the near future. Accordingly, FAFLIC recognized a
$31.0 million pre-tax expense during the third quarter of 1998 related to this
litigation. Although the Company believes that this expense reflects appropriate
recognition of its obligation under the settlement, this estimate assumes the
availability of insurance coverage for certain claims, and the estimate may be
revised based on the amount of reimbursement actually tendered by AFC's
insurance carriers, if any, and based on changes in the Company's estimate of
the ultimate cost of the benefits to be provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, 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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
19. STATUTORY FINANCIAL INFORMATION
The Company and its 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 shareholder's equity reported in accordance with generally accepted
accounting principles 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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies......................... $ 180.7 $ 190.3 $ 155.5
Life and Health Companies............................... 86.4 191.2 133.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies......................... $1,269.3 $1,279.6 $1,201.6
Life and Health Companies............................... 1,164.1 1,221.3 1,120.1
</TABLE>
20. SUBSEQUENT EVENT
On April 1, 1999, Allmerica P&C redeemed an additional 3,246.8 shares of its
issued and outstanding common stock owned by AFC for $125.0 million, thereby
increasing FAFLIC's ownership of Allmerica P&C by 4.8%. The 1999 transaction
consisted of $75.4 million of securities and $49.6 million of cash.
21. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
During the second quarter of 1999, AFC approved a plan to exit its group life
and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of FAFLIC's group life and health insurance business, including its
reinsurance pool business, have been reported in the Consolidated Statements of
Income as discontinued operations in the second quarter of 1999 in accordance
with Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
No. 30"). In the third quarter of 1999, the operating results from the
discontinued business were adjusted to reflect the recording of additional
reserves related to prior years. At December 31, 1998, the businesses had assets
of approximately $480.9 million consisting primarily of invested assets,
premiums and fees receivable, and reinsurance recoverables, and liabilities of
approximately $445.3 million consisting primarily of policy liabilities.
Revenues for the discontinued operations were $398.5 million, $389.2 million,
and $356.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Net (loss) income for the discontinued operations was ($13.3)
million, $16.6 million, and $17.0 million for the years ended December 31, 1998,
1997 and 1996, respectively. On October 6, 1999, AFC announced that it reached
an agreement which provides for the sale of the Company's EBS business effective
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 1, 2000. As a result of this transaction, the Company recorded a
$30.5 million loss, net of taxes, on the disposal of its group life and health
business.
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica P&C, as
well as several non-insurance subsidiaries, from FAFLIC to AFC. FAFLIC has
retained its ownership of AFLIAC and certain other subsidiaries. Under an
agreement with the Commonwealth of Massachusetts Insurance Commissioner ("the
Commissioner"), AFC has contributed to FAFLIC capital of $125.0 million and
agreed to maintain FAFLIC's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 would require the prior approval of the Commissioner. This transaction
was approved by the Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which is included in FAFLIC's net
income, to be transferred from FAFLIC to AFC pursuant to the aforementioned
change in corporate structure was $95.7 million. As of December 31, 1998, the
total assets and total shareholders' equity of these subsidiaries were $4,033.0
million and $1,264.1 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 18, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
Prior to the aforementioned change in AFC's corporate structure, on May 5, 1999
and May 11, 1999, Allmerica P&C redeemed 1,273.9 shares and 4,142.0 shares of
its issued and outstanding common stock owned by AFC for $50.0 million and
$175.0 million, respectively. The May 5, 1999 and May 11, 1999 transactions
consisted of cash and short-term securities. After the May 11, 1999 transaction,
FAFLIC's ownership of Allmerica P&C increased to 84.52%.
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance
Company and the Contractowners of the Separate Account VA-K Allmerica
Advantage Variable Annuity and ExecAnnuity Plus Variable Annuity of First
Allmerica Financial Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account VA-K Allmerica Advantage Variable Annuity and
ExecAnnuity Plus Variable Annuity of First Allmerica Financial Life Insurance
Company at December 31, 1998, the results of each of their operations and the
changes in each of their net assets for each of the two years in the period then
ended, 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 to overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INVESTMENT
GRADE MONEY EQUITY GOVERNMENT
GROWTH INCOME MARKET INDEX BOND
------------ ----------- ------------ -------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $ 21,826,646 $6,957,372 $ 10,375,288 $ 23,413,636 $3,315,626
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- -- --
Receivable from First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- 38,946 --
------------ ----------- ------------ -------------- ----------------
Total assets.............................. 21,826,646 6,957,372 10,375,288 23,452,582 3,315,626
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ 281,836 -- 33 -- --
------------ ----------- ------------ -------------- ----------------
Net assets................................ $ 21,544,810 $6,957,372 $ 10,375,255 $ 23,452,582 $3,315,626
------------ ----------- ------------ -------------- ----------------
------------ ----------- ------------ -------------- ----------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 14,626,276 $4,634,964 $ 6,888,691 $ 15,628,670 $1,862,448
Non-qualified variable annuity
contracts............................... 6,918,534 2,322,408 3,486,564 7,823,912 1,453,178
------------ ----------- ------------ -------------- ----------------
$ 21,544,810 $6,957,372 $ 10,375,255 $ 23,452,582 $3,315,626
------------ ----------- ------------ -------------- ----------------
------------ ----------- ------------ -------------- ----------------
Qualified units outstanding, December 31,
1998....................................... 6,262,251 3,437,335 5,764,875 5,650,027 1,463,251
Net asset value per qualified unit, December
31, 1998................................... $ 2.335626 $ 1.348418 $ 1.194942 $ 2.766123 $ 1.272815
Non-qualified units outstanding, December
31, 1998................................... 2,962,176 1,722,320 2,917,768 2,828,476 1,141,704
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.335626 $ 1.348418 $ 1.194942 $ 2.766123 $ 1.272815
<CAPTION>
SELECT SELECT
AGGRESSIVE SELECT GROWTH SELECT VALUE
GROWTH GROWTH AND INCOME OPPORTUNITY*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $ 20,453,722 $ 23,117,675 $16,452,617 $13,207,156
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- --
Receivable from First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- 32,492 --
------------ ------------ ------------ ------------
Total assets.............................. 20,453,722 23,117,675 16,485,109 13,207,156
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- -- -- --
------------ ------------ ------------ ------------
Net assets................................ $ 20,453,722 $ 23,117,675 $16,485,109 $13,207,156
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 14,495,089 $ 15,445,261 $ 9,707,170 $ 9,098,254
Non-qualified variable annuity
contracts............................... 5,958,633 7,672,414 6,777,939 4,108,902
------------ ------------ ------------ ------------
$ 20,453,722 $ 23,117,675 $16,485,109 $13,207,156
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Qualified units outstanding, December 31,
1998....................................... 7,286,861 5,604,880 4,427,258 4,989,938
Net asset value per qualified unit, December
31, 1998................................... $ 1.989209 $ 2.755681 $ 2.192592 $ 1.823320
Non-qualified units outstanding, December
31, 1998................................... 2,995,479 2,784,217 3,091,291 2,253,528
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.989209 $ 2.755681 $ 2.192592 $ 1.823320
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT SELECT DGPF
INTERNATIONAL CAPITAL INTERNATIONAL FIDELITY VIP FIDELITY VIP FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME EQUITY-INCOME GROWTH
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $15,591,157 $11,147,827 $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- 20,672,042 36,052,923 35,344,990
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- 6,254,787 -- -- --
Receivable from First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- -- -- -- --
------------ ------------ ----------- ------------ ------------ ------------
Total assets.............................. 15,591,157 11,147,827 6,254,787 20,672,042 36,052,923 35,344,990
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- -- -- -- -- --
------------ ------------ ----------- ------------ ------------ ------------
Net assets................................ $15,591,157 $11,147,827 $6,254,787 $20,672,042 $36,052,923 $35,344,990
------------ ------------ ----------- ------------ ------------ ------------
------------ ------------ ----------- ------------ ------------ ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $10,801,187 $ 7,775,538 $4,442,666 $13,257,676 $23,791,242 $23,923,730
Non-qualified variable annuity
contracts............................... 4,789,970 3,372,289 1,812,121 7,414,366 12,261,681 11,421,260
------------ ------------ ----------- ------------ ------------ ------------
$15,591,157 $11,147,827 $6,254,787 $20,672,042 $36,052,923 $35,344,990
------------ ------------ ----------- ------------ ------------ ------------
------------ ------------ ----------- ------------ ------------ ------------
Qualified units outstanding, December 31,
1998....................................... 6,728,831 4,147,763 2,946,096 9,109,025 10,631,627 8,822,677
Net asset value per qualified unit, December
31, 1998................................... $ 1.605210 $ 1.874634 $ 1.507984 $ 1.455444 $ 2.237780 $ 2.711618
Non-qualified units outstanding, December
31, 1998................................... 2,984,015 1,798,906 1,201,684 5,094,230 5,479,395 4,211,973
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.605210 $ 1.874634 $ 1.507984 $ 1.455444 $ 2.237780 $ 2.711618
<CAPTION>
FIDELITY T. ROWE
FIDELITY VIP II PRICE
VIP ASSET INTERNATIONAL
OVERSEAS MANAGER STOCK
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. 6,286,148 6,085,273 --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- 7,914,963
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- --
Receivable from First Allmerica Financial
Life Insurance Company (Sponsor)........... -- -- --
----------- ----------- -----------
Total assets.............................. 6,286,148 6,085,273 7,914,963
LIABILITIES:
Payable to First Allmerica Financial Life
Insurance Company (Sponsor)................ -- -- --
----------- ----------- -----------
Net assets................................ $6,286,148 $6,085,273 $7,914,963
----------- ----------- -----------
----------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $4,222,956 $4,405,083 $5,033,626
Non-qualified variable annuity
contracts............................... 2,063,192 1,680,190 2,881,337
----------- ----------- -----------
$6,286,148 $6,085,273 $7,914,963
----------- ----------- -----------
----------- ----------- -----------
Qualified units outstanding, December 31,
1998....................................... 2,927,485 2,543,524 3,605,982
Net asset value per qualified unit, December
31, 1998................................... $ 1.442520 $ 1.731882 $ 1.395910
Non-qualified units outstanding, December
31, 1998................................... 1,430,269 970,152 2,064,128
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.442520 $ 1.731882 $ 1.395910
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET
------------------------ ---------------------- --------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
----------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 199,572 $ 170,276 $ 372,511 $ 263,167 $ 564,432 $ 516,480
Mortality and expense risk fees............ (223,817) (137,518) (75,848) (48,741) (130,349) (119,272)
Administrative expense fees................ (36,436) (22,387) (12,348) (7,935) (21,220) (19,416)
----------- ----------- ---------- ---------- ------------ ------------
Net investment income (loss)............. (60,681) 10,371 284,315 206,491 412,863 377,792
----------- ----------- ---------- ---------- ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 186,327 2,308,885 -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 41,417 138,749 22,115 9,652 -- --
----------- ----------- ---------- ---------- ------------ ------------
Net realized gain (loss)................... 227,744 2,447,634 22,115 9,652 -- --
Net unrealized gain (loss)................. 2,783,753 (384,729) 69,734 95,127 -- --
----------- ----------- ---------- ---------- ------------ ------------
Net realized and unrealized gain
(loss).................................. 3,011,497 2,062,905 91,849 104,779 -- --
----------- ----------- ---------- ---------- ------------ ------------
Net increase (decrease) in net assets from
operations............................... 2,950,816 2,073,276 376,164 311,270 412,863 377,792
----------- ----------- ---------- ---------- ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,295,185 1,060,800 477,719 503,732 42,956,520 40,462,298
Withdrawals................................ (854,008) (358,269) (278,536) (265,487) (1,527,192) (692,901)
Contract benefits.......................... (139,181) (50,924) -- (29,778) (7,305) (6,827)
Contract charges........................... (5,051) (3,392) (805) (779) (2,579) (1,957)
Transfers between sub-accounts (including
fixed account), net...................... 3,331,381 4,382,510 1,501,451 960,713 (43,621,528) (41,635,156)
Other transfers from (to) the General
Account.................................. 267,895 104,494 (45,851) 96,701 2,251,241 3,255,231
----------- ----------- ---------- ---------- ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 3,896,221 5,135,219 1,653,978 1,265,102 49,157 1,380,688
----------- ----------- ---------- ---------- ------------ ------------
Net increase (decrease) in net assets...... 6,847,037 7,208,495 2,030,142 1,576,372 462,020 1,758,480
NET ASSETS:
Beginning of year.......................... 14,697,773 7,489,278 4,927,230 3,350,858 9,913,235 8,154,755
----------- ----------- ---------- ---------- ------------ ------------
End of year................................ $21,544,810 $14,697,773 $6,957,372 $4,927,230 $ 10,375,255 $ 9,913,235
----------- ----------- ---------- ---------- ------------ ------------
----------- ----------- ---------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT
EQUITY INDEX GOVERNMENT BOND AGGRESSIVE GROWTH
------------------------ ---------------------- ------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 211,978 $ 110,855 $ 154,509 $ 102,465 $ -- $ --
Mortality and expense risk fees............ (215,782) (97,460) (34,372) (22,062) (214,129) (144,461)
Administrative expense fees................ (35,127) (15,865) (5,596) (3,591) (34,858) (23,517)
----------- ----------- ---------- ---------- ----------- -----------
Net investment income (loss)............. (38,931) (2,470) 114,541 76,812 (248,987) (167,978)
----------- ----------- ---------- ---------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 561,319 332,299 -- -- -- 1,126,096
Net realized gain (loss) from sales of
investments.............................. 222,393 113,305 18,037 (2,027) 120,729 143,103
----------- ----------- ---------- ---------- ----------- -----------
Net realized gain (loss)................... 783,712 445,604 18,037 (2,027) 120,729 1,269,199
Net unrealized gain (loss)................. 3,420,684 1,411,233 22,198 22,859 1,626,872 774,210
----------- ----------- ---------- ---------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 4,204,396 1,856,837 40,235 20,832 1,747,601 2,043,409
----------- ----------- ---------- ---------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 4,165,465 1,854,367 154,776 97,644 1,498,614 1,875,431
----------- ----------- ---------- ---------- ----------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,870,086 1,081,244 341,848 213,001 1,667,973 1,341,539
Withdrawals................................ (1,165,798) (264,978) (183,152) (96,612) (1,107,960) (305,223)
Contract benefits.......................... (196,777) (10,484) (230) (28,876) (5,407) (39,679)
Contract charges........................... (4,591) (2,279) (486) (544) (6,478) (5,007)
Transfers between sub-accounts (including
fixed account), net...................... 5,748,639 5,663,963 946,095 (27,766) 3,440,969 2,409,882
Other transfers from (to) the General
Account.................................. 548,442 115,645 24,821 25,505 461,145 366,667
----------- ----------- ---------- ---------- ----------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 6,800,001 6,583,111 1,128,896 84,708 4,450,242 3,768,179
----------- ----------- ---------- ---------- ----------- -----------
Net increase (decrease) in net assets...... 10,965,466 8,437,478 1,283,672 182,352 5,948,856 5,643,610
NET ASSETS:
Beginning of year.......................... 12,487,116 4,049,638 2,031,954 1,849,602 14,504,866 8,861,256
----------- ----------- ---------- ---------- ----------- -----------
End of year................................ $23,452,582 $12,487,116 $3,315,626 $2,031,954 $20,453,722 $14,504,866
----------- ----------- ---------- ---------- ----------- -----------
----------- ----------- ---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH SELECT VALUE
SELECT GROWTH AND INCOME OPPORTUNITY*
------------------------ ------------------------ -----------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 14,598 $ 33,246 $ 175,980 $ 119,664 $ 110,850 $ 52,859
Mortality and expense risk fees............ (204,657) (93,924) (172,330) (108,204) (142,544) (83,766)
Administrative expense fees................ (33,316) (15,290) (28,054) (17,614) (23,204) (13,636)
----------- ----------- ----------- ----------- ----------- ----------
Net investment income (loss)............. (223,375) (75,968) (24,404) (6,154) (54,898) (44,543)
----------- ----------- ----------- ----------- ----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 167,479 582,419 50,575 985,230 41,478 1,269,781
Net realized gain (loss) from sales of
investments.............................. 176,074 58,851 134,894 62,028 26,427 50,672
----------- ----------- ----------- ----------- ----------- ----------
Net realized gain (loss)................... 343,553 641,270 185,469 1,047,258 67,905 1,320,453
Net unrealized gain (loss)................. 4,813,123 1,458,284 1,752,366 545,994 319,879 154,795
----------- ----------- ----------- ----------- ----------- ----------
Net realized and unrealized gain
(loss).................................. 5,156,676 2,099,554 1,937,835 1,593,252 387,784 1,475,248
----------- ----------- ----------- ----------- ----------- ----------
Net increase (decrease) in net assets from
operations............................... 4,933,301 2,023,586 1,913,431 1,587,098 332,886 1,430,705
----------- ----------- ----------- ----------- ----------- ----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,762,877 835,614 916,420 1,048,608 1,013,793 785,030
Withdrawals................................ (1,154,143) (404,348) (709,978) (193,939) (592,743) (191,683)
Contract benefits.......................... (46,068) (16,279) (158,824) (46,768) (6,487) (23,501)
Contract charges........................... (5,919) (2,603) (3,598) (2,639) (3,938) (2,276)
Transfers between sub-accounts (including
fixed account), net...................... 5,348,619 4,485,020 2,191,454 2,856,741 2,413,513 2,887,091
Other transfers from (to) the General
Account.................................. 743,351 484,042 641,774 497,850 408,183 404,673
----------- ----------- ----------- ----------- ----------- ----------
Net increase (decrease) in net assets from
contract transactions.................... 6,648,717 5,381,446 2,877,248 4,159,853 3,232,321 3,859,334
----------- ----------- ----------- ----------- ----------- ----------
Net increase (decrease) in net assets...... 11,582,018 7,405,032 4,790,679 5,746,951 3,565,207 5,290,039
NET ASSETS:
Beginning of year.......................... 11,535,657 4,130,625 11,694,430 5,947,479 9,641,949 4,351,910
----------- ----------- ----------- ----------- ----------- ----------
End of year................................ $23,117,675 $11,535,657 $16,485,109 $11,694,430 $13,207,156 $9,641,949
----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------
</TABLE>
*Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT SELECT CAPITAL DGPF
INTERNATIONAL EQUITY APPRECIATION INTERNATIONAL EQUITY
------------------------ ----------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 191,221 $ 254,851 $ -- $ -- $ 175,659 $ 97,768
Mortality and expense risk fees............ (165,897) (112,688) (115,691) (85,778) (67,460) (44,469)
Administrative expense fees................ (27,006) (18,345) (18,833) (13,963) (10,981) (7,240)
----------- ----------- ----------- ---------- ---------- ----------
Net investment income (loss)............. (1,682) 123,818 (134,524) (99,741) 97,218 46,059
----------- ----------- ----------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- 354,949 1,690,159 -- -- --
Net realized gain (loss) from sales of
investments.............................. 92,023 43,796 152,396 19,575 37,951 53,177
----------- ----------- ----------- ---------- ---------- ----------
Net realized gain (loss)................... 92,023 398,745 1,842,555 19,575 37,951 53,177
Net unrealized gain (loss)................. 1,717,818 (336,142) (486,273) 1,077,745 277,546 14,007
----------- ----------- ----------- ---------- ---------- ----------
Net realized and unrealized gain
(loss).................................. 1,809,841 62,603 1,356,282 1,097,320 315,497 67,184
----------- ----------- ----------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 1,808,159 186,421 1,221,758 997,579 412,715 113,243
----------- ----------- ----------- ---------- ---------- ----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 911,710 820,658 977,644 785,054 450,397 353,682
Withdrawals................................ (543,238) (295,438) (481,265) (126,447) (251,355) (135,450)
Contract benefits.......................... (35,297) (13,488) (6,055) (9,343) -- (16,256)
Contract charges........................... (4,110) (3,317) (3,180) (2,879) (1,772) (1,293)
Transfers between sub-accounts (including
fixed account), net...................... 1,774,816 3,234,322 676,351 944,363 1,017,275 1,372,115
Other transfers from (to) the General
Account.................................. 388,199 493,701 83,210 385,023 99,261 173,166
----------- ----------- ----------- ---------- ---------- ----------
Net increase (decrease) in net assets from
contract transactions.................... 2,492,080 4,236,438 1,246,705 1,975,771 1,313,806 1,745,964
----------- ----------- ----------- ---------- ---------- ----------
Net increase (decrease) in net assets...... 4,300,239 4,422,859 2,468,463 2,973,350 1,726,521 1,859,207
NET ASSETS:
Beginning of year.......................... 11,290,918 6,868,059 8,679,364 5,706,014 4,528,266 2,669,059
----------- ----------- ----------- ---------- ---------- ----------
End of year................................ $15,591,157 $11,290,918 $11,147,827 $8,679,364 $6,254,787 $4,528,266
----------- ----------- ----------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH
------------------------ ------------------------ ------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 1,101,337 $ 555,516 $ 374,220 $ 278,988 $ 117,962 $ 104,466
Mortality and expense risk fees............ (229,389) (135,349) (383,718) (258,842) (344,329) (236,352)
Administrative expense fees................ (37,342) (22,034) (62,466) (42,137) (56,054) (38,476)
----------- ----------- ----------- ----------- ----------- -----------
Net investment income (loss)............. 834,606 398,133 (71,964) (21,991) (282,421) (170,362)
----------- ----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 699,808 68,659 1,331,782 1,402,693 3,085,629 467,608
Net realized gain (loss) from sales of
investments.............................. (41,596) 32,656 347,489 366,416 319,274 226,022
----------- ----------- ----------- ----------- ----------- -----------
Net realized gain (loss)................... 658,212 101,315 1,679,271 1,769,109 3,404,903 693,630
Net unrealized gain (loss)................. (2,709,154) 1,123,721 1,360,035 3,031,743 6,094,613 3,146,128
----------- ----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. (2,050,942) 1,225,036 3,039,306 4,800,852 9,499,516 3,839,758
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... (1,216,336) 1,623,169 2,967,342 4,778,861 9,217,095 3,669,396
----------- ----------- ----------- ----------- ----------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 2,062,177 1,482,581 2,398,189 1,864,708 2,265,258 2,174,564
Withdrawals................................ (987,162) (405,233) (1,518,197) (843,227) (1,842,522) (568,844)
Contract benefits.......................... (107,858) (55,849) (137,044) (120,661) (153,105) (96,880)
Contract charges........................... (4,164) (2,968) (10,250) (8,408) (11,095) (9,149)
Transfers between sub-accounts (including
fixed account), net...................... 5,202,627 4,366,702 5,061,840 3,887,991 2,328,047 1,913,947
Other transfers from (to) the General
Account.................................. 607,069 610,675 935,806 761,386 713,595 609,613
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 6,772,689 5,995,908 6,730,344 5,541,789 3,300,178 4,023,251
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets...... 5,556,353 7,619,077 9,697,686 10,320,650 12,517,273 7,692,647
NET ASSETS:
Beginning of year.......................... 15,115,689 7,496,612 26,355,237 16,034,587 22,827,717 15,135,070
----------- ----------- ----------- ----------- ----------- -----------
End of year................................ $20,672,042 $15,115,689 $36,052,923 $26,355,237 $35,344,990 $22,827,717
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
---------------------- ---------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 92,957 $ 64,086 $ 151,996 $ 122,118 $ 91,052 $ 50,810
Mortality and expense risk fees............ (69,675) (51,919) (65,673) (50,747) (83,667) (55,400)
Administrative expense fees................ (11,343) (8,451) (10,691) (8,262) (13,621) (9,018)
---------- ---------- ---------- ---------- ---------- ----------
Net investment income (loss)............. 11,939 3,716 75,632 63,109 (6,236) (13,608)
---------- ---------- ---------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 273,979 254,403 455,989 306,331 32,136 71,981
Net realized gain (loss) from sales of
investments.............................. 44,391 74,812 59,196 57,413 43,338 20,604
---------- ---------- ---------- ---------- ---------- ----------
Net realized gain (loss)................... 318,370 329,215 515,185 363,744 75,474 92,585
Net unrealized gain (loss)................. 200,255 25,917 92,247 281,812 794,299 (71,013)
---------- ---------- ---------- ---------- ---------- ----------
Net realized and unrealized gain
(loss).................................. 518,625 355,132 607,432 645,556 869,773 21,572
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 530,564 358,848 683,064 708,665 863,537 7,964
---------- ---------- ---------- ---------- ---------- ----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 436,787 384,685 447,933 421,034 476,174 543,817
Withdrawals................................ (334,149) (115,779) (551,001) (145,853) (231,411) (148,536)
Contract benefits.......................... (27,009) (21,985) (68,728) -- (13,764) (16,280)
Contract charges........................... (2,070) (1,994) (1,417) (1,159) (1,792) (1,105)
Transfers between sub-accounts (including
fixed account), net...................... 833,047 322,382 701,410 232,270 1,103,994 1,742,909
Other transfers from (to) the General
Account.................................. 175,177 72,543 102,018 45,740 174,146 401,385
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets from
contract transactions.................... 1,081,783 639,852 630,215 552,032 1,507,347 2,522,190
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets...... 1,612,347 998,700 1,313,279 1,260,697 2,370,884 2,530,154
NET ASSETS:
Beginning of year.......................... 4,673,801 3,675,101 4,771,994 3,511,297 5,544,079 3,013,925
---------- ---------- ---------- ---------- ---------- ----------
End of year................................ $6,286,148 $4,673,801 $6,085,273 $4,771,994 $7,914,963 $5,544,079
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account VA-K, which funds the Allmerica Advantage and ExecAnnuity
Plus variable annuity contracts in addition to other contracts (the Delaware
Medallion variable annuity contracts), is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company). The Company is a
wholly-owned subsidiary of Allmerica Financial Corporation (AFC). Separate
Account 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 contracts issued by the Company. Under applicable insurance law, the
assets and liabilities of Separate Account VA-K are clearly identified and
distinguished from the other assets and liabilities of the Company. Separate
Account VA-K cannot be charged with liabilities arising out of any other
business of the Company.
Separate Account VA-K is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account VA-K
currently offers eighteen Sub-Accounts under the Allmerica Advantage and
ExecAnnuity Plus variable annuity contracts. Each Sub-Account invests
exclusively in a corresponding investment portfolio of Allmerica Investment
Trust (the Trust) managed by Allmerica Financial Investment Management Services,
Inc. (AFIMS) (successor to Allmerica Investment Management Company, Inc.), a
wholly-owned subsidiary of the Company; or of the Variable Insurance Products
Fund (Fidelity VIP) or the Variable Insurance Products Fund II (Fidelity VIP II)
managed by Fidelity Management & Research Company (FMR); or of the Delaware
Group Premium Fund, Inc. (DGPF) managed by Delaware International Advisers Ltd.;
or of the T. Rowe Price International Series, Inc. (T. Rowe Price) managed by T.
Rowe Price-Fleming International, Inc. The Trust, Fidelity VIP, Fidelity VIP II,
DGPF, and T. Rowe Price (the Funds) are open-end, management investment
companies registered under the 1940 Act.
Separate Account VA-K funds 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 Section 401, 403, or 408 of the Internal Revenue Code (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.
Effective January 9, 1998, Small Mid-Cap Value Fund was renamed Select Value
Opportunity Fund.
Certain prior year balances have been reclassified to conform with current
year presentation.
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 Funds. Net realized gains and
losses on securities sold are determined using 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 Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return. The Company anticipates no tax liability resulting from the operations
of Separate Account VA-K. Therefore, no provision for income taxes has been
charged against Separate Account VA-K.
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (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 Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Growth................................ 7,726,246 $19,023,514 $2.825
Investment Grade Income............... 6,146,088 6,772,352 1.132
Money Market.......................... 10,375,288 10,375,288 1.000
Equity Index.......................... 6,870,198 18,057,344 3.408
Government Bond....................... 3,104,519 3,286,179 1.068
Select Aggressive Growth.............. 8,314,521 17,116,546 2.460
Select Growth......................... 9,521,283 16,823,487 2.428
Select Growth and Income.............. 9,248,239 13,540,851 1.779
Select Value Opportunity*............. 7,838,075 12,211,483 1.685
Select International Equity........... 10,110,997 13,233,511 1.542
Select Capital Appreciation........... 6,797,456 10,354,774 1.640
DGPF International Equity............. 379,538 5,580,260 16.480
Fidelity VIP High Income.............. 1,792,892 21,670,302 11.530
Fidelity VIP Equity-Income............ 1,418,290 29,243,967 25.420
Fidelity VIP Growth................... 787,720 24,334,362 44.870
Fidelity VIP Overseas................. 313,524 5,605,653 20.050
Fidelity VIP II Asset Manager......... 335,092 5,255,546 18.160
T. Rowe Price International Stock..... 545,108 6,989,022 14.520
</TABLE>
* Name changed. See Note 1.
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 0.20% 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 and are paid to
the Company on a daily basis.
For contracts issued on Form A3018-94, (ExecAnnuity Plus) a contract fee is
deducted on the contract anniversary and upon full surrender of the contract
when the accumulated value is $50,000 or less. The fee is the lesser of $30 or
3% of the accumulated value on the contract anniversary or full surrender date.
For contracts issued on Form A3025-96 (Allmerica Advantage), a contract fee of
$30 is deducted on the contract anniversary and upon full surrender when the
accumulated value is less than $50,000. The fee is currently waived for all
contracts (ExecAnnuity Plus and Allmerica Advantage) issued to and maintained by
the trustee of a 401(k) plan.
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Separate Account VA-K, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. The current series of contracts have a contingent
deferred sales charge and no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1998 and 1997, the Company received
$172,668 and $112,096, respectively, for contingent deferred sales charges
applicable to Separate Account VA-K.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Growth
Issuance of Units.......................... 3,196,609 $ 6,772,868 3,856,709 $ 6,807,108
Redemption of Units........................ (1,373,701) (2,876,647) (1,107,973) (1,671,889)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,822,908 $ 3,896,221 2,748,736 $ 5,135,219
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Investment Grade Income
Issuance of Units.......................... 2,044,414 $ 2,696,090 1,749,993 $ 2,065,954
Redemption of Units........................ (773,878) (1,042,112) (714,488) (800,852)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,270,536 $ 1,653,978 1,035,505 $ 1,265,102
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Money Market
Issuance of Units.......................... 48,203,810 $ 54,962,039 48,644,659 $ 52,132,820
Redemption of Units........................ (48,148,881) (54,912,882) (47,395,744) (50,752,132)
------------ ------------ ------------ -------------
Net increase (decrease).................. 54,929 $ 49,157 1,248,915 $ 1,380,688
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Equity Index
Issuance of Units.......................... 4,063,578 $ 9,923,583 4,341,062 $ 7,761,304
Redemption of Units........................ (1,295,473) (3,123,582) (1,048,062) (1,178,193)
------------ ------------ ------------ -------------
Net increase (decrease).................. 2,768,105 $ 6,800,001 3,293,000 $ 6,583,111
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Government Bond
Issuance of Units.......................... 2,440,242 $ 3,015,884 988,942 $ 1,104,697
Redemption of Units........................ (1,529,683) (1,886,988) (923,062) (1,019,989)
------------ ------------ ------------ -------------
Net increase (decrease).................. 910,559 $ 1,128,896 65,880 $ 84,708
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Aggressive Growth
Issuance of Units.......................... 3,742,763 $ 7,274,206 3,615,384 $ 5,729,756
Redemption of Units........................ (1,407,342) (2,823,964) (1,349,496) (1,961,577)
------------ ------------ ------------ -------------
Net increase (decrease).................. 2,335,421 $ 4,450,242 2,265,888 $ 3,768,179
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Select Growth
Issuance of Units.......................... 4,160,290 $ 9,729,097 3,637,661 $ 6,526,459
Redemption of Units........................ (1,360,001) (3,080,380) (693,697) (1,145,013)
------------ ------------ ------------ -------------
Net increase (decrease).................. 2,800,289 $ 6,648,717 2,943,964 $ 5,381,446
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Growth and Income
Issuance of Units.......................... 2,568,312 $ 4,993,792 3,020,023 $ 5,126,925
Redemption of Units........................ (1,170,883) (2,116,544) (658,695) (967,072)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,397,429 $ 2,877,248 2,361,328 $ 4,159,853
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Value Opportunity*
Issuance of Units.......................... 2,771,415 $ 5,006,786 2,948,039 $ 4,567,624
Redemption of Units........................ (994,406) (1,774,465) (518,267) (708,290)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,777,009 $ 3,232,321 2,429,772 $ 3,859,334
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select International Equity
Issuance of Units.......................... 2,894,703 $ 4,527,204 3,815,598 $ 5,231,183
Redemption of Units........................ (1,258,209) (2,035,124) (807,150) (994,745)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,636,494 $ 2,492,080 3,008,448 $ 4,236,438
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Capital Appreciation
Issuance of Units.......................... 1,891,659 $ 3,122,674 2,194,137 $ 3,142,169
Redemption of Units........................ (1,142,204) (1,875,969) (845,948) (1,166,398)
------------ ------------ ------------ -------------
Net increase (decrease).................. 749,455 $ 1,246,705 1,348,189 $ 1,975,771
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
DGPF International Equity
Issuance of Units.......................... 1,486,205 $ 2,175,924 1,702,945 $ 2,323,514
Redemption of Units........................ (604,270) (862,118) (460,013) (577,550)
------------ ------------ ------------ -------------
Net increase (decrease).................. 881,935 $ 1,313,806 1,242,932 $ 1,745,964
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP High Income
Issuance of Units.......................... 6,929,705 $ 10,678,702 5,269,060 $ 7,412,189
Redemption of Units........................ (2,520,698) (3,906,013) (1,109,363) (1,416,281)
------------ ------------ ------------ -------------
Net increase (decrease).................. 4,409,007 $ 6,772,689 4,159,697 $ 5,995,908
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP Equity-Income
Issuance of Units.......................... 5,589,831 $ 11,872,225 5,374,700 $ 9,755,802
Redemption of Units........................ (2,438,089) (5,141,881) (2,372,916) (4,214,013)
------------ ------------ ------------ -------------
Net increase (decrease).................. 3,151,742 $ 6,730,344 3,001,784 $ 5,541,789
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
* Name changed. See Note 1.
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Fidelity VIP Growth
Issuance of Units.......................... 3,232,147 $ 7,273,604 4,152,143 $ 7,285,409
Redemption of Units........................ (1,772,972) (3,973,426) (1,919,113) (3,262,158)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,459,175 $ 3,300,178 2,233,030 $ 4,023,251
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP Overseas
Issuance of Units.......................... 1,414,651 $ 1,993,759 1,131,666 $ 1,415,776
Redemption of Units........................ (657,938) (911,976) (644,595) (775,924)
------------ ------------ ------------ -------------
Net increase (decrease).................. 756,713 $ 1,081,783 487,071 $ 639,852
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP II Asset Manager
Issuance of Units.......................... 1,093,306 $ 1,742,931 890,693 $ 1,251,997
Redemption of Units........................ (704,485) (1,112,716) (500,670) (699,965)
------------ ------------ ------------ -------------
Net increase (decrease).................. 388,821 $ 630,215 390,023 $ 552,032
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
T. Rowe Price International Stock
Issuance of Units.......................... 1,891,293 $ 2,454,236 2,394,797 $ 2,924,911
Redemption of Units........................ (756,997) (946,889) (364,946) (402,721)
------------ ------------ ------------ -------------
Net increase (decrease).................. 1,134,296 $ 1,507,347 2,029,851 $ 2,522,190
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the 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
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account VA-K satisfies the current
requirements of the regulations, and it intends that Separate Account VA-K will
continue to meet such requirements.
SA-13
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Separate
Account VA-K during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
Growth............................................... $ 5,529,743 $ 1,231,144
Investment Grade Income.............................. 2,685,220 746,927
Money Market......................................... 25,099,230 24,637,905
Equity Index......................................... 8,540,182 1,260,655
Government Bond...................................... 2,749,701 1,506,264
Select Aggressive Growth............................. 5,172,621 971,366
Select Growth........................................ 7,667,840 1,075,019
Select Growth and Income............................. 4,158,083 1,293,546
Select Value Opportunity*............................ 3,958,148 739,247
Select International Equity.......................... 3,233,279 742,881
Select Capital Appreciation.......................... 3,834,744 1,032,404
DGPF International Equity............................ 1,949,443 538,419
Fidelity VIP High Income............................. 10,384,049 2,076,946
Fidelity VIP Equity-Income........................... 10,122,961 2,132,799
Fidelity VIP Growth.................................. 7,730,499 1,627,113
Fidelity VIP Overseas................................ 1,855,003 487,302
Fidelity VIP II Asset Manager........................ 1,851,543 689,707
T. Rowe Price International Stock.................... 2,012,101 478,854
------------ -----------
Totals............................................. $108,534,390 $43,268,498
------------ -----------
------------ -----------
</TABLE>
* Name changed. See Note 1.
SA-14
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for First Allmerica Financial Life Insurance Company
Financial Statements for Separate Account VA-K of First Allmerica
Financial Life Insurance Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated August 20, 1991 was previously filed on
April 24, 1998 in Post-Effective Amendment No. 9 of
Registration Statement No. 33-71052/811-8114, and is
incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT pursuant to
a trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement was
previously filed on April 24, 1998 in Post-Effective
Amendment No. 9 of Registration Statement No.
33-71052/811-8114, and is incorporated by reference
herein.
(b) Sales Agreements were previously filed on April 24, 1998
in Post-Effective Amendment No. 9 of Registration
Statement No. 33-71052/811-8114, and are incorporated by
reference herein.
(c) General Agent's Agreement was previously filed on April
24, 1998 in Post-Effective Amendment No. 9 of Registration
Statement No. 33-71052/811-8114, and is incorporated by
reference herein.
(d) Career Agent Agreement with Commission Schedule was
previously filed on April 24, 1998 in Post-Effective
Amendment No. 9 of Registration Statement No.
33-71052/811-8114, and is incorporated by reference
herein.
(e) Registered Representative's Agreement was previously
filed on April 24, 1998 in Post-Effective Amendment
No. 9 of Registration Statement No. 33-71052/811-8114,
and is incorporated by reference herein.
EXHIBIT 4 (a) Contract Form A3030-99GRC is filed herewith;
(b) Specification Pages Form A8030-99 is filed herewith; and
<PAGE>
(c) Enhanced Death Benefit Rider with 5% Accumulation and
Ratchet (Form 3263-99) was previously filed on September
14, 1999 in Registrant's initial Registration Statement
No. 333-87105/811-8114, and is incorporated by reference
herein.
EXHIBIT 5 Application Form 11214 was previously filed on September 14,
1999 in Registrant's initial Registration Statement No.
333-87105/811-8114, and is incorporated by reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation and Bylaws, as
amended to reflect its name change, were previously filed on
October 1, 1995 in Post-Effective Amendment No. 4 of
Registration Statement No. 33-71052/811-8114, and are
incorporated by reference herein. The Depositor's Revised
Bylaws were previously filed on April 30, 1996 in
Post-Effective Amendment No. 5 of Registration Statement
No. 33-71052/811-8114, and are incorporated by reference
herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Services Agreement was previously filed on
April 30, 1996 in Post-Effective Amendment No. 5 of
Registration Statement No. 33-71052/811-8114, and is
incorporated by reference herein.
(b) An Amendment to the Fidelity Services Agreement, effective
as of January 1, 1997, was previously filed on May 1, 1997
in Post-Effective Amendment No. 8 of Registration
Statement No. 33-71052/811-8114, and is incorporated by
reference herein.
(c) Fidelity Service Contract, effective January 1, 1997, was
previously filed on May 1, 1997 in Post-Effective
Amendment No. 8 of Registration Statement No.
33-71052/811-8114, and is incorporated by reference
herein.
(d) T. Rowe Price Service Agreement was previously filed on
April 24, 1998 in Post-Effective Amendment No. 9 of
Registration Statement No. 33-71052/811-8114, and is
incorporated by reference herein.
(e) BFDS Agreements for lockbox and mailroom services were
previously filed on April 24, 1998 in Post-Effective
Amendment No. 9 of Registration Statement No.
33-71052/811-8114, and are incorporated by reference
herein.
(f) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Schedule for Computation of Performance Quotations is filed
herewith.
EXHIBIT 14 Not Applicable.
<PAGE>
EXHIBIT 15 (a) Participation Agreement with Allmerica Investment Trust
was previously filed on April 24, 1998 in Post-Effective
Amendment No. 9 of Registration Statement No.
33-71052/811-8114, and is incorporated by reference
herein.
(b) Participation Agreement, as amended, with Variable
Insurance Products Fund was previously filed on April
24, 1998 in Post-Effective Amendment No. 9 of Registration
Statement No. 33-71052/811-8114, and is incorporated by
reference herein.
(c) Participation Agreement, as amended, with Variable
Insurance Products Fund II was previously filed on April
24, 1998 in Post-Effective Amendment No. 9 of
Registration Statement No. 33-71052/811-8114, and is
incorporated by reference herein.
(d) Form of Participation Agreement with Delaware Group
Premium Fund, Inc. was previously filed on April 24, 1998
in Post-Effective Amendment No. 9 of Registration
Statement No. 33-71052/811-8114, and is incorporated by
reference herein.
(e) Participation Agreement with T. Rowe Price International
Series, Inc. was previously filed on April 24, 1998 in
Post-Effective Amendment No. 9 of Registration Statement
No. 33-71052/811-8114, and is incorporated by reference
herein.
ITEM 25. DIRECTORS AND PRINCIPAL OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01553
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998) of
Vice President and First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997) and Vice President
Director and Chief (since 1995) of First Allmerica; and Corporate Manager (1979 to 1995) of
Information Officer Digital Equipment Corporation
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary since (1999) of
Secretary Allmerica Investments, Inc.; and Secretary (since 1999) of Allmerica
Financial Investment Management Services, Inc.
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice President
Director, Vice President and (since 1991) of First Allmerica; and Vice President (since 1998) of
Chief Investment Officer Allmerica Financial Investment Management Services, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
John F. Kelly Director (since 1996), Senior Vice President (since 1986), General
Director, Vice President and Counsel (since 1981) and Assistant Secretary (since 1991) of First
General Counsel Allmerica; Director (since 1985) of Allmerica Investments, Inc.; and
Director (since 1990) of Allmerica Financial Investment Management
Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President (since
Director 1996) of The Hanover Insurance Company; and Vice President (1993 to
1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992),
Director President (since 1994) and Chief Executive Officer (since 1996) of
Citizens Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of First
Director and Chairman of Allmerica; Director (since 1989) of Allmerica Investments, Inc.; and
the Board Director and Chairman of the Board (since 1990) of Allmerica Financial
Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and Vice President and
Director, Vice President, Treasurer (since 1993) of First Allmerica; Treasurer (since 1993) of
Chief Financial Officer and Allmerica Investments, Inc.; and Treasurer (since 1993) of Allmerica
Treasurer Financial Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director, President and Allmerica; Director (since 1990) of Allmerica Investments, Inc.; and
Chief Executive Officer Director and President (since 1998) of Allmerica Financial Investment
Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica; Chief
Director Executive Officer (1996 to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; Director (since 1991) of Allmerica Investments, Inc.; and
Director (since 1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
|_________________________________________________________________________________________________________________________
| | | | | | | | | |
| 100% 100% 100% 100% 100% 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial Investments Investments Investments Investments Investments
| Inc. Management Investment Services Insurance Insurance Insurance Insurance Insurance
| Company, Inc. Management Insurance Agency Inc. Agency of Agency Inc. Agency Inc. Agency Inc.
| Services, Inc. Agency, Inc. of Alabama Florida Inc. of Georgia of Kentucky of Mississippi
|
|Massachusetts Massachusetts Massachusetts Massachusetts Alabama Florida Georgia Kentucky Mississippi
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
- ----------------- ----------------- -----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
----------------- -----------------
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Advantage Insurance Network, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, Inc. 440 Lincoln Street Insurance Broker
Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and health
Annuity Company (formerly known as Worcester MA 01653 insurance, annuities, variable
SMA Life Assurance Company) annuities and variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. Worcester MA 01653
(formerly known as Allmerica
Institutional Services, Inc. and 440
Financial Group of Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Allmerica Investments Insurance Agency Inc. 200 Southbridge Parkway Insurance Agency
of Alabama Suite 400
Birmingham, AL 35209
Allmerica Investments Insurance Agency of 14211 Commerce Way Insurance Agency
Florida, Inc. Miami Lakes, FL 33016
Allmerica Investment Insurance Agency Inc. 1455 Lincoln Parkway Insurance Agency
of Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Inc. Barkley Bldg-Suite 105 Insurance Agency
of Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency Inc. 631 Lakeland East Drive Insurance Agency
of Mississippi Flowood, MS 39208
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance Agency, Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
Allmerica Property & Casualty Companies, Inc. 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust company
Worcester MA 01653
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the Midwest 3950 Priority Way South Multi-line property and casualty
Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas
Carlsbad, CA 92008 Computer software company
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident and
Company (formerly State Mutual Life Worcester MA 01653 health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management Company, 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty
Richardson TX 75081 insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service franchises
Worcester MA 01653
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of October 31, 1999, there were 6,219 Contract holders of qualified
Contracts and 1,765 Contract holders of non-qualified Contracts.
As of October 31, 1999, there were no Contract Form A3030-99GRC Owners
since sales had not yet begun.
<PAGE>
ITEM 28. INDEMNIFICATION
To the fullest extent permissible under Massachusetts General Laws, no
director shall be personally liable to the Company or any policyholder for
monetary damages for any breach of fiduciary duty as a director,
notwithstanding any provision of law to the contrary; provided, however,
that this provision shall not eliminate or limit the liability of a
director:
1. for and breach of the director's duty of loyalty to the Company or
its policyholders;
2. for acts or omissions not in good faith, or which involve intentional
misconduct or a knowing violation of law;
3. for liability, if any, imposed on directors of mutual insurance
companies pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c. 156B
Section 62;
4. for any transactions from which the director derived an improper
personal benefit.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for
the following:
X VEL Account, VEL II Account, VEL Account III, Select Account III,
Separate Account IMO, Separate Account SPL-D, Inheiritage Account,
Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, VA-P,
Allmerica Select Separate Account II, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account, Fulcrum
Variable Life Separate Account, and Allmerica Select Separate
Account of Allmerica Financial Life Insurance and Annuity Company
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select
Separate Account of First Allmerica Financial Life Insurance
Company.
X Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors
and Officers of Allmerica Investments,Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
<S> <C>
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Mary Eldridge Secretary
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
(c) As indicated in Part B (Statement of Additional Information) in response to
Item 20(c), the aggregate amount of commissions retained by Allmerica
Investments, Inc., the principal underwriter of the Contracts, was $3,517,207.62
for sales of variable contracts funded by the Registrant in 1998. No other
commissions or compensation was received by the principal underwriter, directly
or indirectly, from the Registrant during the Registrant's last fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to file a post-effective amendment to
this registration statements as frequently as is necessary to ensure
that the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
<PAGE>
(c) The Registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the
requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act may
be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Director, Officer or
Controlling Person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Director, Officer or
Controlling Person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges under
the Policies are reasonable in relation to the services rendered,
expenses expected to be incurred, and risks assumed by the Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of First Allmerica Financial Life Insurance
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the
1940 Act with respect to withdrawal restrictions under the Texas Optional
Retirement Program ("Program") and (b) relying on the "no-action" letter
(Ref. No. IP-6-88) issued on November 28, 1988 to the American Council of
Life Insurance, in applying the withdrawal restrictions of Internal Revenue
Code Section 403(b)(11). Registrant has taken the following steps in
reliance on the letter:
1. Appropriate disclosures regarding the redemption/withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have been
included in the prospectus of each registration statement used in
connection with the offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption/withdrawal
restrictions imposed by the Program and by Section 403(b)(11) have been
included in sales literature used in connection with the offer of the
Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the variable
contracts have been instructed to specifically bring the
redemption/withdrawal restrictions imposed by the Program and by
Section 403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of (i)
the restrictions on redemption/withdrawal imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available under
the employer's arrangement will be obtained from each participant who
purchases a variable annuity contract prior to or at the time of
purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer plan, determines
that denial or limitation is necessary for the variable annuity contracts
to meet the requirements of the Program or of Section 403(b). Any transfer
request not so denied or limited will be effected as expeditiously as
possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Pre-effective Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Worcester, and Commonwealth
of Massachusetts, on the 15th day of December, 1999.
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /S/ MARY ELDRIDGE
----------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Pre-effective
Amendment No. 1 to its Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/S/ WARREN E. BARNES Vice President and Corporate Controller December 15, 1999
- ---------------------------
Warren E. Barnes
EDWARD J. PARRY* Director, Vice President, Chief Financial
- --------------------------- Officer and Treasurer
RICHARD M. REILLY* Director, President and
- --------------------------- Chief Executive Officer
JOHN F. O'BRIEN* Director and Chairman of the Board
- ---------------------------
BRUCE C. ANDERSON* Director
- ---------------------------
ROBERT E. BRUCE* Director and Chief Information Officer
- ---------------------------
JOHN P. KAVANAUGH* Director, Vice President and
- --------------------------- Chief Investment Officer
JOHN F. KELLY* Director, Vice President and
- --------------------------- General Counsel
J. BARRY MAY* Director
- ---------------------------
JAMES R. MCAULIFFE* Director
- ---------------------------
ROBERT P. RESTREPO, JR.* Director
- ---------------------------
ERIC A. SIMONSEN* Director and Vice President
- ---------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated July 1, 1999 duly executed
by such persons.
/S/ SHEILA B. ST. HILAIRE
- ---------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
<PAGE>
EXHIBIT TABLE
Exhibit 4(a) Contract Form A3030GRC-99
Exhibit 4(b) Specificiation Pages Form A8030-99
Exhibit 8(f) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 13 Schedule for Computation of Performance Quotations
<PAGE>
PLEASE READ THIS CERTIFICATE CAREFULLY
Annuity benefit payments and other values provided by this certificate, when
based on the investment performance of the Variable Account, may increase or
decrease and are not guaranteed as to fixed dollar amount. Please refer to the
Value of the Variable Account section for additional information.
RIGHT TO EXAMINE CERTIFICATE
The Owner may cancel this certificate by returning it to the Company or one of
its authorized representatives within ten days after receipt. If returned, the
Company will refund gross payments.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Home Office: Worcester, MA
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
This is a legal certificate between First Allmerica Financial Life Insurance
Company (the Company) and the Owner and is issued in consideration of the
Initial Payment shown on the Specifications page. Additional Payments are
permitted. Payments may be allocated to Variable Sub-Accounts, the Fixed Account
or Guarantee Period Accounts. While this certificate is in effect, the Company
agrees to pay annuity benefit payments beginning on the Annuity Date or to pay a
Death Benefit to the Beneficiary if an Owner dies prior to the Annuity Date.
President Secretary
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefit Payments Payable on the Annuity Date
Death Benefit Payable to Beneficiary if Owner Dies prior to Annuity Date
Non-Participating
<PAGE>
TABLE OF CONTENTS
SPECIFICATONS
DEFINITIONS
OWNER, ANNUITANT AND BENEFICIARY
THE ACCUMULATION PHASE
PAYMENTS
VALUES
TRANSFER
WITHDRAWAL AND SURRENDER
DEATH BENEFIT
THE PAYOUT PHASE
ANNUITY BENEFIT
TRANSFER
WITHDRAWAL
PRESENT VALUE OF ANNUITY BENEFIT PAYMENTS
DEATH OF THE ANNUITANT
ANNUITY BENEFIT PAYMENT OPTIONS
ANNUITY BENEFIT PAYMENT GUARANTEE OPTIONS
ANNUITY OPTION TABLES
GENERAL PROVISIONS
Form A3030-99GRC 2
<PAGE>
DEFINITIONS
Accumulated Value The aggregate value of all accounts in
this certificate before the Annuity Date. As
long as the Accumulated Value is greater
than zero, the certificate will stay in
effect.
Accumulation Unit A measure used to calculate the value
of a Sub-Account before annuity benefit
payments begin.
Annuitant On and after the Annuity Date, the person
upon whose continuation of life annuity
benefit payments involving life contingency
depend. Joint Annuitants are permitted and
unless otherwise indicated, any reference to
Annuitant shall include joint Annuitants.
Annuity Date The date annuity benefit payments
begin. The Annuity Date is shown on the
Specifications page.
Annuity Unit A measure used to calculate annuity
benefit payments under a variable annuity
option.
Beneficiary The person, persons or entity entitled to
the Death Benefit prior to the Annuity Date
or any annuity benefit payments upon the
death of the Owner on or after the Annuity
Date.
Certificate Year A one-year period based on the issue date or
an anniversary thereof.
Company First Allmerica Financial Life Insurance
Company.
Effective Valuation Date The Valuation Date on or immediately
following the day a payment, request for
transfer, withdrawal or surrender, or proof
of death is received at the Principal
Office.
Fixed Account The part of the Company's General Account
to which all or a portion of a Payment or
transfer may be allocated.
Fund Each separate investment company, investment
series or portfolio eligible for investment
by a Sub-Account of the Variable Account.
General Account All assets of the Company that are not
allocated to a Separate Account.
Group Annuity Contract The Company's Group Annuity Contract No.
A3030-99GRP, owned by the First Allmerica
Financial Life Insurance Group Annuity
Trust.
Guarantee Period The number of years that a Guaranteed
Interest Rate may be credited to a Guarantee
Period Account.
Guarantee Period Account An account which corresponds to a
Guaranteed Interest Rate for a
specified Guarantee Period and is
supported by assets in a Separate
Account. The Owner may only invest
in a Guarantee Period Account prior to the
Annuity Date.
Guaranteed Interest Rate The annual effective rate of interest after
daily compounding credited to a Guarantee
Period Account.
Market Value Adjustment A positive or negative adjustment to
earnings in a Guarantee Period Account
assessed if any portion of a Guarantee
Period Account is withdrawn or transferred
prior to the end of its Guarantee Period.
Form A3030-99GRC 3
<PAGE>
Participant - Owner The person, persons or entity entitled to
exercise the rights and privileges under
this certificate (herein called the Owner).
Joint Owners are permitted and unless
otherwise indicated, any reference to Owner
shall include joint Owners.
Pro Rata How a Payment or withdrawal may be
allocated among the accounts. A Pro Rata
allocation or withdrawal will be made in the
same proportion that the value of each
account bears to the Accumulated Value.
Request A request or notice made by the Owner, in a
manner consistent with the Company's current
procedures, which is received and recorded
by the Company.
Separate Account A segregated account established by
the Company. The assets in a Separate
Account are not commingled with the
Company's general assets and obligations.
The assets of a Separate Account are not
subject to claims arising out of any other
business the Company may conduct.
State The state or jurisdiction in which the
certificate is issued.
Sub-Account A Variable Account subdivision that invests
exclusively in shares of a corresponding
Fund.
Surrender Value The amount payable to the Owner on
full surrender after application of any
Market Value Adjustment and Certificate Fee.
Survivor Annuity Benefit The number of Annuity Units (under a
Percentage variable joint life annuitization option)
or the dollar value of the annuity benefit
payments (under a fixed joint life
annuitization option) paid during the
surviving Annuitant's life may be less
than or equal to the number of Annuity Units
paid when both individuals are living. The
Survivor Annuity Benefit Percentage is the
percentage of total Annuity Units or dollars
paid in each annuity benefit during the
survivor's life. For example, with a Joint
and Two-thirds Survivor Option, the Survivor
Annuity Benefit Percentage is 66 2/3 %. This
percentage is only applicable after the
death of the first Annuitant.
Valuation Date A day the values of all units are
determined. Valuation Dates occur on each
day the New York Stock Exchange is open for
trading, or such other dates when there is
sufficient trading in a Fund's portfolio
securities such that the current unit value
may be materially affected.
Valuation Period The interval between two consecutive
Valuation Dates.
Variable Account The Company's Separate Account,
consisting of Sub-Accounts that invest in
the underlying Funds.
Form A3030-99GRC 4
<PAGE>
OWNER, ANNUITANT AND BENEFICIARY
Owner When the certificate is issued, the Owner
will be as shown on the Specifications page.
The Owner may be changed in accordance with
the terms of this certificate. Upon the
death of an Owner prior to the Annuity Date,
a Death Benefit is paid. The Maximum
Alternative Annuity Date is based upon the
age of the Owner.
The Owner may exercise all rights and
options granted in this certificate or by
the Company, subject to the consent of any
irrevocable Beneficiary. Where there are
joint Owners, the consent of both is
required in order to exercise any ownership
rights.
Assignment Prior to the Annuity Date and prior to the
death of an Owner, the Owner may be changed
at any time. Only the Owner may assign this
certificate. An absolute assignment will
transfer ownership to the assignee. This
certificate may also be collaterally
assigned as security. The limitations on
ownership rights while the collateral
assignment is in effect are stated in the
assignment. Additional limitations may
exist for certificates issued under
provisions of the Internal Revenue Code.
An assignment will take place only when the
Company has actually received a Request in
writing and recorded the change at the
Principal Office. The Company will not be
deemed to know of the assignment until such
time. When recorded, the assignment will
take effect as of the date it was signed.
The assignment will be subject to payments
made or actions taken by the Company before
the change was recorded.
The Company will not be responsible for the
validity of any assignment nor the extent of
any assignee's interest. The interests of
the Beneficiary will be subject to any
assignment.
Annuitant When the certificate is issued, the
Annuitant will be as shown on the
Specifications page. The Annuitant may be
changed in accordance with the terms of
this certificate. Prior to the Annuity
Date, an Annuitant may be replaced or
added unless the Owner is a non-natural
person. At all times there must be at
least one Annuitant. If the Annuitant
dies and a replacement is not named, the
Owner will be considered to be the new
Annuitant. Upon the death of an Annuitant
prior to the Annuity Date, a Death Benefit
is not paid unless the Owner is a
non-natural person.
A change of Annuitant will take place only
when the Company has actually received a
Request in writing and recorded the change
at the Principal Office. The Company will
not be deemed to know of the change of
Annuitant until such time. When recorded,
the change of Annuitant will take effect as
of the date it was signed. The change of
Annuitant will be subject to payments made
or actions taken by the Company before the
change was recorded.
Form A3030-99GRC 5
<PAGE>
Beneficiary The Beneficiary is as named on the
Specifications page unless subsequently
changed. The Owner may declare any
Beneficiary to be revocable or irrevocable.
A revocable Beneficiary may be changed at
any time prior to the Annuity Date and
before the death of an Owner or after the
Annuity Date and before the death of the
Annuitant. An irrevocable Beneficiary must
consent in writing to any change. Unless
otherwise indicated, the Beneficiary will be
revocable.
A Beneficiary change must be made in writing
in a form acceptable to the Company and will
be subject to the rights of any assignee of
record. When the Company receives the form,
the change will take place as of the date it
was signed, even if an Owner or the
Annuitant dies after the form is signed but
prior to the Company's receipt of the form.
Any rights created by the change will be
subject to payments made or actions taken by
the Company before the change was recorded.
All benefits payable to the Beneficiary
under this certificate will be divided
equally among the surviving Beneficiaries of
the same class, unless the Owner directs
otherwise. If there is no surviving
Beneficiary in a particular class, then the
benefit is divided equally among the
surviving Beneficiaries of the next class.
If there is no surviving Beneficiary, the
deceased Beneficiary's interest will pass to
the Owner or the Owner's estate. At the
death of the first joint Owner prior to the
Annuity Date, the surviving joint Owner is
the sole, primary Beneficiary
notwithstanding that the designated
Beneficiary may be different.
The Beneficiary can not assign, transfer,
commute, anticipate or encumber the proceeds
or payments unless given that right by the
Owner.
Protection of Proceeds To the extent allowed by law,
this certificate and any payments made under
it will be exempt from the claims of
creditors.
Form A3030-99GRC 6
<PAGE>
THE ACCUMULATION PHASE
PAYMENTS
Payments Each Payment is equal to the gross payment
less the amount of any applicable premium
tax. The Company reserves the right to
deduct the amount of the premium tax from
the Accumulated Value at a later date rather
than when the premium tax liability is first
incurred by the Company. In no event will an
amount be deducted for premium taxes before
the Company has incurred a tax liability
under applicable State law.
Initial Payment The Initial Payment is shown on the
Specifications page.
Additional Payments Prior to the Annuity Date and
before the death of an Owner, the Owner may
make additional Payments of at least the
Minimum Additional Payment Amount (see
Specifications page). Total Payments made
may not exceed [$5,000,000] without the
Company's consent.
Payment Allocations The Initial Payment is allocated
in accordance with the Payment Allocation,
shown on the Specifications page. Each
subsequent Payment will be allocated in the
same manner unless allocation instructions
accompany the Payment or the Payment
Allocation is changed by the Owner.
The minimum amount that may be allocated to
the Guarantee Period Account is shown on the
Specifications page. If the Owner requests
an allocation less than the minimum amount,
the Company reserves the right to apply that
amount to the [money market Sub-Account.]
VALUES
Value of the Variable The value of a Sub-Account on a Valuation
Account Date is determined by multiplying the
Accumulation Units in that Sub-Account by
the Accumulation Unit Value as of the
Valuation Date.
Form A3030-99GRC 7
<PAGE>
Accumulation Units are purchased when an
amount is allocated to a Sub-Account. The
number of Accumulation Units purchased
equals that amount divided by the applicable
Accumulation Unit Value as of the Valuation
Date.
Accumulation Unit The value of a Sub-Account Accumulation Unit
Values as of any Valuation Date is determined by
multiplying the value of an Accumulation
Unit for the preceding Valuation Date by
the Net Investment Factor for that Valuation
Period.
Net Investment Factor The Net Investment Factor
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 (which may be positive or
negative) 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 the Mortality and Expense
Risk Charge applicable to the
current Valuation Period (see
Specifications page) plus any
applicable Rider charges; and
(d) is the Administrative Charge
applicable to the current
Valuation Period (see
Specifications page).
The Company assumes the risk that its actual
mortality expense experience may exceed the
amounts provided under the certificate. The
Company guarantees that the charge for
mortality and expense risks and the
administrative charge will not be increased.
Subject to applicable State and federal
laws, these charges may be decreased or the
method used to determine the Net Investment
Factor may be changed.
Value of the Fixed Amounts allocated to the Fixed Account
Account receive interest at rates periodically
set by the Company. The Company
guarantees that the initial rate of
interest in effect when an amount is
allocated to the Fixed Account will
remain in effect for that amount for
one year or until such amount is transferred
out of the Fixed Account, whichever is
sooner. Thereafter, the rate of interest
for that amount will be the Company's
current interest rate, but no less than
the Minimum Fixed Account Guaranteed
Interest Rate (see Specifications page).
The value of the Fixed Account on any date
is the sum of amounts allocated to the Fixed
Account plus interest compounded and
credited daily at the rates applicable to
those amounts. The value of the Fixed
Account will be at least equal to the
minimum required by law in the State in
which this certificate is delivered.
Form A3030-99GRC 8
<PAGE>
Value of the Guarantee Amounts allocated to the same Guarantee
Period Accounts Period Account on the same day will be
treated as one Guarantee Period Account.
The interest rate in effect when an amount
is allocated to a Guarantee Period Account
is guaranteed for the duration of the
Guarantee Period. Each time the
Guaranteed Interest Rate changes for a
particular Guarantee Period, a new Guarantee
Period Account is established.
The value of a Guarantee Period Account on
any date is the sum of amounts allocated to
that Guarantee Period Account plus interest
compounded and credited daily at the rate
applicable to that amount.
Guaranteed Interest The Company will periodically set Guaranteed
Rates Interest Rates for each available Guarantee
Period. These rates will be guaranteed for
the duration of the respective Guarantee
Periods. A Guaranteed Interest Rate will
never be less than the Guarantee Period
Account Minimum Interest Rate (see
Specifications page).
Renewal Guarantee At least 45 days (but not more than 75 days)
Periods prior to the end of a Guarantee Period, the
Company will notify the Owner in writing of
the expiration of that 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 as of
the day following the expiration of the
Guarantee Period. The transfer will not be
subject to a Market Value Adjustment; see
"Market Value Adjustment," page [13].
Guaranteed Interest Rates corresponding to
the available Guarantee Periods may be
higher or lower than the previous Guaranteed
Interest Rate. If reallocation instructions
are not received at the Principal Office
before the end of a Guarantee Period, the
Guarantee Period Account value will be
automatically applied to a new Guarantee
Period Account with the same Guarantee
Period unless:
(a) less than the Guarantee Period
Account Minimum Allocation
Amount (see Specifications
page) remains in the Guarantee
Period Account on its
expiration date; or
(b) 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 the [money
market Sub-Account.]
Certificate Fee Prior to the Annuity Date on each
certificate anniversary and when the
certificate is surrendered, the Company will
deduct a Certificate Fee (see
Specifications page) Pro Rata.
Form A3030-99GRC 9
<PAGE>
TRANSFER
Prior to the Annuity Date, the Owner may
transfer amounts among accounts by Request
to the Principal Office. Transfers to a
Guarantee Period Account must be at least
equal to the Minimum Guarantee Period
Account Allocation Amount (see
Specifications page). If the Owner requests
the transfer of a smaller amount to the
Guarantee Period Account, the Company may
transfer that amount to the [money market
Sub-Account.]
Any transfer from a Guarantee Period Account
prior to the end of its Guarantee Period
will be subject to a Market Value
Adjustment.
There is no charge for the first twelve
transfers per certificate year. A transfer
charge of up to $25 may be imposed on each
additional transfer.
The Company reserves the right to establish
and impose reasonable rules restricting
transfers. All transfers are subject to the
Company's consent.
By Request, the Owner may elect automatic
transfers (Dollar Cost Averaging) of at
least $100 on a periodic basis to one or
more Sub-accounts from one of the following
source Accounts; (1) the Fixed Account; (2)
the money market Sub-Account or (3) any
additional Sub-Accounts that the Company may
offer under its then current rules.
Automatic transfers may not be made into the
Fixed Account or into an account that is
also used as a source Account.
Automatic transfer may be made on a monthly,
bi-monthly, quarterly, semi-annual, or
annual basis. The first automatic transfer
out of the source Account will be treated as
one transfer for purposes of the transfer
provision regardless of how many
Sub-accounts are involved. Any subsequent
automatic transfer that are made while this
arrangement is in effect during the
certificate year will never be treated as a
transfer without charge.
(The Company reserves the right to limit the
number of Sub-Accounts that may be utilized
for automatic transfer and to discontinue
the arrangement at any time upon advanced
written notice to the Owner.) If an
automatic transfer would reduce the balance
in the source Account to less than the
automatic transfer amount elected, the
balance will be transferred proportionately
to the chosen Sub-Account(s). Automatic
transfers will continue unless the amount in
the source Account on the date an automatic
transfer is to occur is zero or until the
Owner's Request to terminate the arrangement
is received at the Principal Office.
By Request, the Owner may elect automatic
rebalancing of Sub-Account allocations
(automatic Account, Rebalancing) to be made
at least as frequently as monthly,
bi-monthly, quarterly, semi-annually, or
annually. The Owner will designate the
percentage allocation or amounts invested in
each of the Sub-Accounts chosen. On periodic
transfer dates specified by the Owner, the
Company will review the percentage
allocation in the various Sub-Accounts and,
as necessary, reestablish the original
designated percentage allocation mix. If the
amount necessary to reestablish the
designated mix on any transfer date is less
than $100, no transfer will be made. The
first rebalancing transfer will count as one
transfer for purposes of the transfer
provision regardless of how many
Sub-Accounts are involved. The arrangement
will terminate when the Owner's Request us
received at the Principal Office, (The
Company reserves the right to limit the
number of Sub-Accounts that may be utilized
for automatic rebalancing and to discontinue
the arrangement upon Request to the Owner.)
WITHDRAWAL AND SURRENDER
Prior to the Annuity Date, the Owner may, by
Request, withdraw a part of the Surrender
Value or surrender the certificate for its
Surrender Value.
Form A3030-99GRC 10
<PAGE>
Any withdrawal must be at least the Minimum
Withdrawal Amount (see Specifications page).
A withdrawal will not be permitted if the
Accumulated Value remaining in the
certificate would be less than the Minimum
Accumulated Value After Withdrawal (see
Specifications page). The Request must
indicate the dollar amount to be paid and
the accounts from which it is to be
withdrawn. A withdrawal from a Guarantee
Period Account will be subject to a Market
Value Adjustment.
The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from
amounts in the Sub-Accounts and/or Fixed
Account on a monthly, bi-monthly, quarterly,
semi-annual or annual basis. The amount of
each automatic withdrawal must meet the
minimum withdrawal requirements explained in
the paragraph above. The Owner may Request a
specific dollar amount or a specific
percentage of the Accumulated Value and the
percentage if this amount to be taken from
each designated Sub-Account and/or Fixed
Account. The first withdrawal will take
place in the later of the 15th day following
the issue date, the Effective Valuation
Date, or, if later, the date specified by
the Owner.
Systematic withdrawals will automatically
cease as of the Annuity Date. The Owner may
change or terminate the systematic
withdrawals by Request to the Principal
Office only.
When surrendered, this certificate
terminates and the Company has no further
liability under it. The Surrender Value will
be based on the Accumulated Value on the
Effective Valuation Date.
Amounts taken from the Variable Account will
be paid within 7 days of the date a Request
is received except that the Company reserves
the right to defer surrenders and partial
redemptions of amounts in the Variable
Account during any period when (1) trading
on the New York Stock Exchange is restricted
as determined by the Securities and Exchange
Commission or the Exchange is closed for
other than weekends and holidays; (2) the
Securities and Exchange Commission by order
has permitted such suspension, or (3) an
emergency exists as determined by the
Securities and Exchange Commission such that
disposal of portfolio securities or
valuation of assets of the Separate Account
are not reasonably practicable.
Amounts taken from the Fixed Account or the
Guarantee Period Accounts will normally be
paid within 7 days of the date a Request is
received. The Company may defer payment for
up to six months from the receipt date. If
deferred for 30 days or more, the amount
payable will be credited interest at a
rate(s) then being credited by the Company.
However, no interest will be paid if it is
less than $25 or the delay is pursuant to
New York law.
Form A3030-99GRC 11
<PAGE>
Market Value Adjustment A transfer, withdrawal or surrender from a
Guarantee Period Account after the
expiration of its Guarantee Period will not
be subject to a Market Value Adjustment. A
Market Value Adjustment will apply to all
other transfers, withdrawals or surrenders
from, a Guarantee Period Account. Amounts
in a Guarantee Period Account that are
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 by the market value factor. The
market value factor for each Guarantee
Period Account is equal to:
(1+i) n/365
(1+j) -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 new 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 new
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 an amount based on the Guarantee
Period Account Minimum Interest Rate (see
Specifications page).
Form A3030-99GRC 12
<PAGE>
DEATH BENEFIT
At the death of an Owner prior to the
Annuity Date, the Company will pay to the
Beneficiary a Death Benefit upon receipt at
the Principal Office of proof of death. If
the Owner is a non-natural person, prior to
the Annuity Date, a Death Benefit is paid on
the death of an Annuitant upon receipt at
the Principal Office of proof of death.
Death Benefit The Death Benefit will be the greater of:
(a) the Accumulated Value on the
Effective Valuation Date, increased
by any positive Market Value
Adjustment; or
(b) the sum of the gross payments made
under this certificate prior to the
date of death, proportionately
reduced to reflect all partial
withdrawals.
For each withdrawal, the
proportionate reduction is
calculated by multiplying the Death
Benefit under the (b) option,
immediately prior to the withdrawal,
by the following:
Amount of the withdrawal
------------------------
Accumulated Value immediately prior to the withdrawal
Payment of the Death Unless the Owner has specified otherwise,
Benefit the Death Benefit will be paid to the
Beneficiary within 7 days of the Effective
Valuation Date. Alternatively, the
Beneficiary may, by a Request in writing,
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 distributions over his/her
life expectancy (or over a period
not extending beyond such life
expectancy). Distributions 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 the [money market
Sub-Account]. The excess, if any, of the
Death Benefit over the Accumulated Value
will also be transferred to the [money
market Sub-Account.] The Beneficiary may, by
Request, effect transfers and withdrawals,
but may not make additional Payments. If
there are multiple Beneficiaries, the
consent of all is required.
If the sole Beneficiary is the deceased
Owner's spouse, the Beneficiary may, by
Request in writing, continue the certificate
and become the new Owner and Annuitant
subject to the following:
(a) any value in the Guarantee Period
Accounts will be transferred to the
[money market Sub-Account];
(b) the excess, if any, of the Death
Benefit over the certificate's
Accumulated Value will also be
transferred to the [money market
Sub-Account];
(c) additional Payments may be made; and
(d) any subsequent spouse of the new
Owner, if named as the Beneficiary,
may not continue the certificate.
Form A3030-99GRC 13
<PAGE>
THE PAYOUT PHASE
ANNUITY BENEFIT
Annuity Options Annuity Options are available on a
fixed, variable or combination fixed and
variable basis. The Annuity Options
described below or any alternative option
offered by the Company may be chosen. If no
option is chosen, monthly benefit payments
will be made under the Life Annuity with
Cash Back option.
The Owner may also elect to have the Death
Benefit applied under any Annuity Option not
extending beyond the Beneficiary's life
expectancy. Such an election may not be
altered by the Beneficiary.
Fixed annuity options are funded through the
General Account. Variable annuity options
may be funded through one or more of the
Sub-Accounts. Not all Sub-Accounts may be
made available.
Selection of Annuity The Owner must select an Annuity Benefit
Benefit Payments Payment Option. Annuity benefit payments
will be paid monthly or at any other
frequency currently offered by the Company.
If the first payment would be less than the
Minimum Annuity Benefit Payment (see
Specifications page), a single payment will
be made instead. If a life annuity option
has been elected, satisfactory proof of the
date of birth of the Annuitant must be
received at the Principal Office before any
payment is made. Also, if a life annuity
option has been elected, the Company may
require from time to time satisfactory
proof that the Annuitant is alive.
Annuity Benefit In the case of a variable annuity option,
Payment Change Frequency the Owner must select an Annuity Benefit
Payment Change Frequency. This is the
frequency of change in the dollar value of
the variable annuity benefit payments. For
example, if an annual Annuity Benefit
Payment Change Frequency is chosen,
the dollar value of variable annuity benefit
payments will remain constant within each
one-year period. The Owner must also select
the date of the first change.
Assumed Investment In the case of a variable annuity option,
Return the Owner must select an Assumed Investment
Return ("AIR"). This rate is used to
determine the initial variable annuity
benefit payment and how the payment will
change over time in response to the
performance of the selected Sub-Accounts.
If the actual performance of any selected
Sub-Account (as measured by the Net
Investment Factor) is equal to the AIR,
the annuity benefit payment attributable to
that Sub-Account will be constant. If the
actual performance is greater than the AIR,
the annuity benefit payment will increase.
If the actual performance is less than the
AIR, the annuity benefit payment will
decrease.
Reversal of Decision The Owner may reverse the decision to
To Annuitize annuitize by a Request in writing within
90 days after the Annuity Date. Upon
receipt of such notice, the Company will
place the certificate back to the
Accumulation Phase subject to the following:
Form A3030-99GRC 14
<PAGE>
(a) The funds applied under a variable
annuity option during this period
will be treated as if they had been
invested in the Accumulation Phase
of the certificate, with the same
allocations that were in effect
since the Annuity Date.
(b) The funds applied under a fixed
annuity option during this period
will be treated as if they had been
invested in the Accumulation Phase
of the certificate in the Fixed
Account, since the Annuity Date.
(c) Any annuity benefit payment paid or
withdrawal taken during this period
will treated as a withdrawal of the
Surrender Value as of the date of
the payment or withdrawal. Fixed
annuity benefit payments will be
treated as withdrawals from the
Fixed Account. Variable annuity
benefit payments will be treated as
withdrawals from the variable
Sub-Accounts.
(d) If the Company learns of the Owner's
decision to reverse after the
Maximum Alternate Annuity Date (see
Specifications page) the Owner must
immediately select another Annuity
Benefit Payment Option.
Annuity Value The Annuity Value will be the Accumulated
Value, after application of any applicable
Market Value Adjustment less any applicable
premium tax. For a Death Benefit annuity,
the Annuity Value will be the amount of the
Death Benefit, less any applicable premium
tax. The Annuity Value applied under a
variable Annuity Option is based on the
Accumulation Unit Value on a Valuation Date
not more than four weeks, uniformly applied,
before the Annuity Date.
The amount of the first annuity benefit
payment under all available options except
period certain options will depend on the
age and/or sex of the Annuitant on the
Annuity Date and the Annuity Value applied.
Period certain options are based only on the
duration of payments and the Annuity Value.
Annuity Unit Values A Sub-Account Annuity Unit Value
on any Valuation Date is equal to its value
on the preceding Valuation Date multiplied
by the product of:
(a) a discount factor equivalent to
the Assumed Investment Return
calculated on a daily basis; and
(b) the Net Investment Factor of the
Sub-Account funding the annuity
benefit payments for the
applicable Valuation Period.
The value of an Annuity Unit as of any date
other than a Valuation Date is equal to its
value as of the preceding Valuation Date.
Each variable annuity benefit payment is
equal to the number of Annuity Units
multiplied by the applicable value of an
Annuity Unit, except that under a Joint and
Survivor Option, after the first death, the
number of units in each payment is equal to
the total number of units multiplied by the
Survivor Annuity Benefit Percentage.
Form A3030-99GRC 15
<PAGE>
Variable annuity benefit payments will
increase or decrease with the value of the
Annuity Units as of the date of the first
payment of each Annuity Benefit Payment
Change Frequency. The Company guarantees
that the amount of each variable annuity
benefit payment will not be affected by
changes in mortality and expense experience.
Number of Annuity Units For each Sub-Account the number of Annuity
Units determining the benefit payable is
equal to the amount of the first annuity
benefit payment divided by the value of the
Annuity Unit as of the Valuation Date used
to calculate the amount of the first
payment. Once annuity benefit payments
begin, the number of Annuity Units will not
change unless a split, a withdrawal or a
transfer is made.
Payment of Annuity Annuity Benefit Payments are paid to the
Benefit Payments Owner. By Request in writing, the Owner may
direct that payments are made to another
person, persons or entity. If an Owner,
who is not also an Annuitant, dies on or
after the Annuity Date, the following
occurs:
(a) If the deceased Owner was the sole
Owner, then the remaining annuity
benefit payments will be payable to
the Beneficiary in accordance with
the terms of the Annuity Option
selected. Upon the death of a sole
Owner, the Beneficiary becomes the
Owner of the certificate.
(b) If the certificate has joint Owners,
then the remaining annuity benefit
payments will be payable to the
surviving joint Owner in accordance
with the terms of the Annuity Option
selected. Upon the death of the
surviving joint Owner, the
Beneficiary becomes the Owner of the
certificate.
TRANSFER
After the Annuity Date and prior to the
death of the Annuitant, the Owner may
transfer among Sub-accounts by Request to
the Principal Office.
Transfers may increase or decrease the
number of Annuity Units in each subsequent
payment.
There is no charge for the first twelve
transfers per certificate year. A transfer
charge of up to $25 may be imposed on each
additional transfer.
The Company reserves the right to establish
and impose reasonable rules restricting
transfers. All transfers are subject to the
Company's consent.
By Request, the Owner may elect automatic
rebalancing of Sub-Account allocations
(automatic Account, Rebalancing) to be made
at least as frequently as monthly,
bi-monthly, quarterly, semi-annually, or
annually. The Owner will designate the
percentage allocation or amounts invested in
each of the Sub-Accounts chosen. On periodic
transfer dates specified by the Owner, the
Company will review the percentage
allocation in the various Sub-Accounts and,
as necessary, reestablish the original
designated percentage allocation mix. If the
amount necessary to reestablish the
designated mix on any transfer date is less
than $100, no transfer will be made. The
first rebalancing transfer will count as one
transfer for purposes of the transfer
provision regardless of how many
Sub-Accounts are involved. The arrangement
will terminate when the Owner's Request us
received at the Principal Office, (The
Company reserves the right to limit the
number of Sub-Accounts that may be utilized
for automatic rebalancing and to discontinue
the arrangement upon Request to the Owner.)
WITHDRAWAL
After the Annuity Date and prior to the
death of the Annuitant, the Owner may have
the right, based on the Annuity Option
selected, to make withdrawals. If the Death
Benefit is applied under an Annuity Option
the Beneficiary may also make withdrawals in
accordance with this provision.
Form A3030-99GRC 16
<PAGE>
Amounts withdrawn that were applied under a
variable Annuity Option will be paid within
7 days of the date a Request is received.
The Company reserves the right to delay
payments subject to applicable laws, rules
and regulations governing variable
annuities.
Amounts withdrawn that were applied under a
fixed Annuity Option will normally be paid
within 7 days of the date a Request is
received. The Company may defer payment for
up to six months from the date a Request is
received. If deferred for 30 days or more,
the amount payable will be credited interest
at a rate of at least 3% or the appropriate
rate mandated by the State.
Only one Request for withdrawal under each
provision may be made each calendar year.
Payment Withdrawal Each calendar year, the Owner can request
Amount Option up to an amount equal to the Payment
Withdrawal Amount (see Specifications page)
multiplied by the previous annuity benefit
payment.
For fixed Annuity Options, each withdrawal
proportionately reduces the dollar amount of
each future annuity benefit payment. The
proportionate reduction is calculated by
multiplying the dollar amount of each future
annuity benefit payment by the following:
Amount of the withdrawal
------------------------
Present Value of all remaining fixed annuity
benefit payments immediately prior the withdrawal.
For variable Annuity Options, each
withdrawal proportionately reduces the
number of Annuity Units in each future
annuity benefit payment. The proportionate
reduction is calculated by multiplying the
number of Annuity Units in each future
annuity benefit payment by the following:
Amount of the withdrawal
------------------------
Present Value of all remaining fixed annuity
benefit payments immediately prior the withdrawal.
Present Value Over the life of the certificate, for
Withdrawal Option period certain, life with period certain
and cash back Annuity Options when there are
remaining guaranteed payments, the Owner
may request withdrawals which represent a
percentage of the Present Value of those
remaining guaranteed annuity benefit
payments. Each year a withdrawal is taken
under this provision, the Company records
the percentage withdrawn. Each withdrawal
proportionately reduces future annuity
benefit payments. (See proportionate
reduction calculation below.) The total
percentage withdrawn over the life of the
certificate cannot exceed the Present Value
Withdrawal Amount (see Specifications page).
Form A3030-99GRC 17
<PAGE>
For fixed Annuity Options, each withdrawal
proportionately reduces the dollar amount of
each future annuity benefit payment. The
proportionate reduction is calculated by
multiplying the dollar amount of each future
annuity benefit payment by the following:
Amount of the withdrawal
------------------------
Present Value of all remaining fixed guaranteed annuity benefit
payments immediately prior to the withdrawal
For variable Annuity Options, each
withdrawal proportionately reduces any
remaining guaranteed payments. The
proportionate reduction is calculated by
multiplying the number of Annuity Units in
each future annuity benefit payment by the
following:
Amount of the withdrawal
------------------------
Present Value of all remaining variable guaranteed annuity benefit
payments immediately prior to the withdrawal
If an Annuitant is still living after there
are no remaining guaranteed payments under a
life with period certain or life with cash
back payout:
(a) for variable Annuity Options, the
number of Annuity Units will
increase to the number of Annuity
Units payable prior to any
withdrawals, adjusted for transfers.
(b) for fixed Annuity Options, the
dollar amount of the annuity benefit
payments will increase to the amount
payable prior to any withdrawals,
adjusted for transfers.
PRESENT VALUE OF ANNUITY BENEFIT PAYMENTS
For a variety of purposes, it is at times
necessary to determine the Present Value of
either all future annuity benefit payments
or of future guaranteed annuity benefit
payments. Present Values are calculated
based on the Annuity 2000 Mortality Table,
male, female or unisex rates as appropriate,
and the interest rate or AIR used to
determine the annuity benefit payments.
DEATH OF THE ANNUITANT
Unless otherwise indicated by the Owner,
upon the death of the Annuitant, the Present
Value of the remaining guaranteed annuity
benefit payments may be paid to the Owner.
Form A3030-99GRC 18
<PAGE>
ANNUITY BENEFIT PAYMENT OPTIONS
PERIOD CERTAIN ANNUITY:
Periodic annuity benefit payments for a
chosen number of years. The number of years
selected may be from 5 to 30.
LIFE ANNUITY:
(a) Single Life - Periodic annuity
benefit payments during the
Annuitant's life. The annuity
benefit payments do not continue
after the death of the Annuitant.
(b) Joint and Survivor - Periodic
annuity benefit payments during
the joint lifetime of the joint
Annuitants. For variable options,
after the first death, the number
of units in each payment during the
lifetime of the survivor is equal
to the total number of units
multiplied by the Survivor Annuity
Benefit Percentage. For fixed
options, after the first death, the
dollar amount of each payment
during the lifetime of the survivor
is equal to the dollar value of each
payment paid prior to such death
multiplied by the Survivor Annuity
Benefit Percentage.
ANNUITY BENEFIT PAYMENT GUARANTEE OPTIONS
If a life Annuity Option has been elected,
the Owner may also select one of the
following guarantees:
PERIOD CERTAIN
Periodic guaranteed payments for a period of
ten years, or any other period currently
made available by the Company.
CASH BACK:
Upon notification of the Annuitant's death,
any excess of the Annuity Value applied over
the total amount of the annuity benefit
payments will be paid to the Owner or
Beneficiary, whichever is applicable.
ANNUITY OPTION RATES
The first variable annuity benefit payment
will be based on the Annuity Option Rates
made available by the Company on the rate
basis available at the time the Annuity
Option is selected. The fixed annuity
benefit payments will be based on the
greater of the guaranteed Annuity Option
Rates shown in the tables on the following
pages or the Company's non-guaranteed
current Annuity Option Rates applicable to
this class of certificates. The Company
guarantees that once an Annuity Option is
selected, the annuity benefit payments will
not be affected by changes in mortality and
expense experience.
Form A3030-99GRC 19
<PAGE>
ANNUITY OPTION TABLES
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIES
<TABLE>
<CAPTION>
Age Nearest Life Annuity with Life Life Annuity
Payment Payments Guaranteed Annuity with Cashback
for 10 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Male Female Unisex Male Female Unisex Male Female Unisex
50 4.05 3.81 3.91 4.08 3.83 3.93 3.90 3.72 3.79
51 4.11 3.87 3.97 4.15 3.89 3.99 3.96 3.77 3.85
52 4.18 3.93 4.03 4.22 3.95 4.06 4.01 3.82 3.90
53 4.25 3.99 4.10 4.30 4.01 4.13 4.07 3.88 3.96
54 4.33 4.06 4.17 4.38 4.08 4.20 4.14 3.94 4.02
55 4.41 4.13 4.24 4.46 4.15 4.28 4.20 3.99 4.07
56 4.49 4.20 4.32 4.55 4.23 4.36 4.27 4.06 4.14
57 4.58 4.28 4.40 4.65 4.31 4.45 4.34 4.12 4.21
58 4.68 4.36 4.49 4.75 4.40 4.54 4.42 4.19 4.28
59 4.78 4.45 4.58 4.86 4.49 4.64 4.50 4.26 4.36
60 4.88 4.54 4.67 4.98 4.59 4.74 4.58 4.34 4.44
61 4.99 4.63 4.77 5.10 4.69 4.85 4.67 4.42 4.52
62 5.10 4.73 4.88 5.23 4.80 4.97 4.76 4.50 4.60
63 5.23 4.84 4.99 5.37 4.92 5.10 4.85 4.59 4.69
64 5.35 4.95 5.11 5.52 5.04 5.24 4.95 4.68 4.79
65 5.48 5.07 5.24 5.69 5.18 5.38 5.06 4.78 4.89
66 5.62 5.20 5.37 5.86 5.32 5.54 5.17 4.89 5.00
67 5.77 5.33 5.51 6.04 5.47 5.70 5.28 4.99 5.11
68 5.92 5.47 5.65 6.24 5.64 5.88 5.40 5.11 5.23
69 6.07 5.62 5.80 6.45 5.82 6.07 5.52 5.23 5.35
70 6.23 5.78 5.96 6.67 6.01 6.27 5.66 5.36 5.48
71 6.39 5.94 6.12 6.90 6.21 6.49 5.79 5.49 5.61
72 6.56 6.11 6.29 7.16 6.44 6.72 5.94 5.63 5.75
73 6.73 6.29 6.47 7.43 6.68 6.98 6.09 5.78 5.90
74 6.90 6.48 6.65 7.71 6.94 7.25 6.24 5.94 6.06
75 7.08 6.67 6.83 8.02 7.22 7.54 6.41 6.11 6.23
</TABLE>
These tables are based on an annual interest rate of 3%
and the Annuity 2000 Mortality Tables.
Form A3030-99GRC 20
<PAGE>
ANNUITY OPTION TABLES (Continued)
First Monthly Annuity Benefit Payment
for Each $1,000 of Annuity Value Applied
Joint and Survivor Life Annuity
Older Age
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 55 60 65 70 75 80
Y 50 3.53 3.61 3.68 3.73 3.76 3.79 3.80
O 55 3.77 3.88 3.97 4.04 4.08 4.11
U 60 4.10 4.25 4.36 4.45 4.50
N 65 4.55 4.74 4.90 5.01
G 70 5.16 5.43 5.64
E 75 6.02 6.41
R 80 7.25
A
G
E
Joint and Two-Thirds Survivor Life Annuity
Older Age
50 55 60 65 70 75 80
Y 50 3.80 3.93 4.09 4.25 4.43 4.61 4.80
O 55 4.11 4.29 4.49 4.70 4.91 5.13
U 60 4.53 4.77 5.02 5.29 5.55
N 65 5.09 5.42 5.75 6.07
G 70 5.88 6.31 6.75
E 75 6.99 7.59
R 80 8.58
A
G
E
</TABLE>
These tables are based on an annual interest rate of 3%
and the Annuity 2000 Mortality Table
Form A3030-99GRC 21
<PAGE>
ANNUITY OPTION TABLES (CONTINUED)
First Monthly Annuity Benefit Payment
for Each $1,000 of Annuity Value Applied
<TABLE>
<CAPTION>
Number of Years Variable or Certain Annuity
for a Certain Period
<S> <C>
5 17.91
10 9.61
15 6.87
20 5.51
25 4.71
30 4.18
</TABLE>
These tables are based on an annual interest rate of 3%
and the Annuity 2000 Mortality Tables.
Form A3030-99GRC 22
<PAGE>
GENERAL PROVISIONS
Entire Certificate The entire certificate consists of this
certificate, any application attached
at issue, riders, Specifications pages
and endorsements. All statements made
by the Participant-Owner shall be deemed
representations and not warranties
and no such statement shall be used in any
contest unless it is contained in a
written signed application, nor, if such
statement was made by a Participant-Owner,
unless a copy of the application
containing such statement is, or has been,
furnished to such Participant-Owner or to
his or her Beneficiary. This Certificate
is delivered in and governed by the laws of
New York. At issue, this Certificate is
incorporated into and becomes a part of
the Company's Group Variable Annuity
Contract No. A3030-99GRP.
Misstatement of Age If the age or sex of an individual is
or Sex misstated, the Company will adjust all
benefits payable to that which would be
available at the correct age or sex. Any
underpayments already made by the Company
will be paid immediately. Any overpayments
will be deducted from future annuity
benefits payments.
Failure to Notify Company After the Annuity Date and once notified of
of Annuitant Death the Annuitant's death, the Company reserves
the right to recover any overpaid annuity
benefit payments.
Modifications Only the President or Vice President of the
Company may modify or waive any provisions
of this certificate. Agents or Brokers are
not authorized to do so.
Incontestability The Company cannot challenge the validity of
this certificate after it has been in force
for more than two years from the date of
issue.
Change of Annuity Date The Owner may change the Annuity Date by
Request at any time after the issue date.
The request must be received at the
Principal Office at least one month
before the new Annuity Date. To the extent
permitted by applicable laws, rules and
regulations governing variable annuities,
the new Annuity Date must be no later than
the Maximum Alternative Annuity Date shown
on the Specifications page.
Minimums All values and benefits available under this
certificate equal or exceed those required
by the State in which the certificate is
delivered.
Annual Report The Company will furnish an annual
report to the Owner containing a statement
of the number and value of Accumulation
Units credited to the Sub-Accounts, the
value of the Fixed Account and the Guarantee
Period Accounts and any other information
required by applicable law, rules and
regulations.
Addition, Deletion, or The Company reserves the right, subject to
Substitution of Investments compliance with applicable law, to add to,
delete from, or substitute for the
shares of a Fund that are held by the
Sub-Accounts or that the Sub-Accounts may
purchase. The Company also reserves the
right to eliminate the shares of any Fund no
longer available for investment or if the
Company believes further investment in the
Fund is no longer appropriate for the
purposes of the Sub-Accounts.
Form A3030-99GRC 23
<PAGE>
The Company will not substitute shares
attributable to any interest in a
Sub-Account without notice to the Owner and
prior approval of the Securities and
Exchange Commission as required by the
Investment Company Act of 1940. This will
not prevent the Variable Account from
purchasing other securities for other series
or classes of certificates, or from
permitting a conversion between series or
classes of certificates on the basis of
requests made by Owners.
The Company reserves the right, subject to
compliance with applicable laws, to
establish additional Separate Accounts,
Guarantee Period Accounts and Sub-Accounts
and to make them available to any class or
series of certificates as the Company
considers appropriate. Each new Separate
Account or Sub-Account will invest in a new
investment company, or in shares of another
open-end investment company, or such other
investments as may be permitted under
applicable law. The Company also reserves
the right to eliminate or combine existing
Sub-Accounts and to transfer the assets of
any Sub-Accounts to any other Sub-Accounts.
In the event of any substitution or change,
the Company may, by appropriate notice, make
such changes in this and other certificates
as may be necessary or appropriate to
reflect the substitution or change. If the
Company considers it to be in the best
interests of the Owners, the Variable
Account or any Sub-Account may be operated
as a management company under the Investment
Company Act of 1940 or in any other form
permitted by law, or may be de-registered
under the Act in the event registration is
no longer required, or may be combined with
other accounts of the Company.
No material changes in the investment policy
of a Variable Account or any Sub-Account
will be made without approval pursuant to
the applicable insurance laws of the state
of New York.
Changes in Law The Company reserves the right to
make any changes to provisions of the
certificate to comply with, or give Owners
the benefit of, any federal or State
statute, rule, or regulation.
Change of Name Subject to compliance with
applicable law, the Company reserves the
right to change the names of the Variable
Account or the Sub-Accounts.
Federal Tax The Variable Account is not currently
Considerations subject to tax, but the Company reserves
the right to assess a charge for taxes if
the Variable Account becomes subject to
tax, subject to prior notification to the
Superintendent of Insurance.
Splitting of Units The Company reserves the right to
split the value of a unit, either to
increase or decrease the number of units.
Any splitting of units will have no material
effect on the benefits, provisions or
investment return of this certificate or
upon the Owner, the Annuitant, any
Beneficiary, or the Company.
Insulation of Separate The investment performance of Separate
Account Account assets is determined separately from
the other assets of the Company. The assets
of a Separate Account equal to the reserves
and liabilities of the certificates
supported by the account will not be charged
with liabilities from any other business
that the Company may conduct.
Form A3030-99GRC 24
<PAGE>
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefit Payments Payable on the Annuity Date
Death Benefit Payable to Beneficiary if Owner Dies prior to Annuity Date
Non-Participating
Form A3030-99GRC 25
<PAGE>
SPECIFICATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
Contract Type: [NQ] Contract Number: [zz00600000]
Issue Date: [ ] Annuity Date: [xx/xx/xxxx]
(Must be at least [1] year after the issue date)
Owner: [John Doe] Owner Date of Birth: [xx/xx/xxxx]
Joint Owner: [Jane Doe] Joint Owner Date of Birth: [xx/xx/xxxx]
Annuitant: [John Doe] Annuitant Date of Birth: [xx/xx/xxxx]
Joint Annuitant: [Jane Doe] Joint Annuitant Date of Birth: [xx/xx/xxxx]
Annuitant Sex: [Male] Beneficiary(ies):
Joint Annuitant Sex: [Female] Primary: Surviving Joint Owner, if any
1st Contingent: [John Doe]
2nd Contingent: [Jane Doe]
Minimum Fixed Account Minimum Additional Payment
Guaranteed Interest Rate: [3%] Amount: [$50.00]
Guarantee Period Account Guarantee Period Account
Minimum Interest Rate: [3%] Minimum Allocation Amount: [$1,000.00]
Minimum Withdrawal Minimum Accumulated Value
Amount: [$100.00] After Withdrawal: [$10,000.00]
Minimum Annuity Maximum Alternative Annuity Date: [xx/yy/zzzz]
Benefit Payment: [$100.00] (Must be at least [1] year after the issue date)
Mortality and Expense Risk Charge: [.65%] on an annual basis of the daily value of the Sub-Account
assets.
Administrative Charge: [.15%] on an annual basis of the daily value of the Sub-Account
assets.
Contract Fee: [$35, if the Accumulated Value is less than $75,000.00.]
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
[(1-800-782-8380)]
</TABLE>
A8030-99
<PAGE>
SPECIFICATIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Owner: [John Doe] Contract Number: [zzz0000000]
Joint Owner: [Jane Doe]
Initial Payment: [$50,000.00]
Payment Allocation: (The Initial Payment is allocated in the following manner:)
Variable Sub-Accounts:
-----------------------
Select Emerging Markets Fund
Select International Equity Fund
T. Rowe Price International Stock Portfolio
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Fidelity VIP Growth Portfolio
Select Growth and Income Fund
Fidelity VIP Equity-Income Portfolio
Fidelity VIP High Income Portfolio
Select Income Fund
Money Market Fund
Fixed Account
--------------
</TABLE>
A8030-99
<PAGE>
SPECIFICATIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Owner: [John Doe] Contract Number: [zzz0000000]
Joint Owner: [Jane Doe]
Guarantee Period Accounts
-------------------------
Guarantee Interest Expiration
Period Rate Date
------- ------- ------
[2 years
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years]
-------
100% TOTAL
</TABLE>
A8030-99
<PAGE>
SPECIFICATIONS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
RIDER(S) SELECTED:
[Enhanced Death Benefit Rider:]
[EDB Effective Annual Yield [5%]]
[EDB Charge: [.25%] on an annual basis of the Accumulated Value
of the contract deducted Pro Rata on the last day
of each month]
</TABLE>
A8030-99
<PAGE>
SPECIFICATIONS (SUPPLEMENT)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Contract Type: [Non-qualified] Contract Number: [??00600000]
Owner: [John Doe] Owner Date of Birth: [xx/xx/xxxx]
Joint Owner: [John Doe] Joint Owner Date of Birth: [xx/xx/xxxx]
Annuitant: [John Doe] Annuitant Date of Birth: [xx/xx/xxxx]
Joint Annuitant: [John Doe] Joint Annuitant Date of Birth: [xx/xx/xxxx]
Annuitant Sex: [Male] Beneficiary(ies):
Joint Annuitant Sex: [Male] Primary: Surviving Joint Owner, if any
1st Contingent: [John Doe]
2nd Contingent: [John Doe]
Payee: [John Doe]
Payee Address: [ 1 Main Street, Anytown, USA ]
Annuity Date: [xx/yy/zzzz]
Expiration of 90-Day Period: [xx/yy/zzzz]
Annuity Benefit Payment Option: [Joint with 2/3 Survivor Option]
Survivor Annuity Benefit Percentage: [66 2/3%]
Percentage under a Fixed Annuity Option: [30%]
Percentage under a Variable Annuity Option: [70%]
Assumed Investment Return: [4%]
Annuity Benefit Payment Change Frequency: [Annual]
Annuity Benefit Frequency: [Monthly]
[Payment Withdrawal Amount [10] times the previous annuity
benefit payment
[but not more than the remaining
guaranteed annuity benefit payments.]]
[Present Value Withdrawal Amount: [75%] of Present Value of remaining guaranteed
annuity benefit payments.]
Mortality and Expense Risk Charge: [.65% ] on an annual basis of the daily value of the Sub-Account assets.
Administrative Charge: [.15%] on an annual basis of the daily value of the Sub-Account assets.
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
[(1-800-782-8380)]
</TABLE>
A8030-99
<PAGE>
SPECIFICATONS (SUPPLEMENT)
Variable Allocation on Annuity Date:
Sub-Accounts:
-------------
Select Emerging Markets Fund
Select International Equity Fund
T. Rowe Price International Stock Portfolio
Select Aggressive Growth Fund
Select Capital Appreciation Fund
Select Value Opportunity Fund
Select Strategic Growth Fund
Fidelity VIP Growth Portfolio
Select Growth and Income Fund
Fidelity VIP Equity-Income Portfolio
Fidelity VIP High Income Portfolio
Select Income Fund
Money Market Fund
A8030-99
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by First Allmerica Financial Life Insurance
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and with any
other regulatory agency or state authority that may so require, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and Chief Executive 7/1/99
- ----------------------------- Officer
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 7/1/99
- -----------------------------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and 7/1/99
- ----------------------------- Chief Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 7/1/99
- ----------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President and 7/1/99
- ----------------------------- General Counsel
John F. Kelly
/s/ J. Barry May Director 7/1/99
- -----------------------------
J. Barry May
/s/ James R. McAuliffe Director 7/1/99
- -----------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief Financial 7/1/99
- ----------------------------- Officer and Treasurer
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 7/1/99
- -----------------------------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 7/1/99
- -----------------------------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 7/1/99
- -----------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President 7/1/99
- -----------------------------
Phillip E. Soule
</TABLE>
<PAGE>
December 15, 1999
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT VA-K (EXECANNUITY PLUS/ALLMERICA ADVANTAGE)
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Gentlemen:
In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this Pre-effective Amendment No. 1 to the Registration Statement
for Separate Account VA-K on Form N-4 under the Securities Act of 1933 and
amendment under the Investment Company Act of 1940, with respect to the
Company's qualified and non-qualified variable annuity contracts.
I am of the following opinion:
1. Separate Account VA-K is a separate account of the Company validly
existing pursuant to the Massachusetts Insurance Code and the regulations
issued thereunder.
2. The assets held in Separate Account VA-K are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The variable annuity contracts, when issued in accordance with the
Prospectus contained in the Pre-effective Amendment No. 1 to the
Registration Statement and upon compliance with applicable local law, will
be legal and binding obligations of the Company in accordance with their
terms and when sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Pre-effective Amendment No. 1 to the Registration Statement of Separate Account
VA-K on Form N-4 filed under the Securities Act of 1933 and amendment under the
Investment Company Act of 1940.
Very truly yours,
/s/ John C. Donlon, Jr.
John C. Donlon, Jr.
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-effective Amendment No. 1 to the Registration
Statement of Separate Account VA-K Allmerica Advantage Variable Annuity and
ExecAnnuity Plus Variable Annuity of First Allmerica Financial Life Insurance
Company on Form N-4 of our report dated February 2, 1999, except for paragraph 2
of Note 18 and Note 20, which are as of March 19, 1999 and April 1, 1999,
respectively, relating to the financial statement of First Allmerica Financial
Life Insurance Company, and our report dated March 26, 1999, relating to the
financial statements of Separate Account VA-K Allmerica Advantage Variable
Annuity and ExecAnnuity Plus Variable Annuity of First Allmerica Financial Life
Insurance Company, both of which appear in such Statement of Additional
Information. We also consent to the reference to us under the heading "Experts"
in such Statement of Additional Information.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 17, 1999
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AGENCY NO LOAD Since Inception of Underlying Portfolio
1 Year Without Surrender
Equity Index Fund (1.273041-1.000000)/1.000000 = 27.30%
Money Market Fund (1.046660-1.000000)/1.000000 = 4.67%
Since Inception of Underlying Portfolio
5 Years Without Surrender
Equity Index Fund ((2.747693/1.000000)^(.200000))-1 = 22.40%
Money Market Fund ((1.238946/1.000000)^(.200000))-1 = 4.38%
Since Inception of Underlying Portfolio
10 Years or Since Inception Without Surrender
Equity Index Fund ((4.426309/1.000000)^(0.121021))-1 = 19.72%
Money Market Fund ((1.594350/1.000000)^(0.100000))-1 = 4.78%
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AGENCY NO LOAD - FAFLIC Since Inception of Underlying Portfolio
1 Year With Complete Withdrawal
Equity Index Fund ((1.273041-1.000000)/1.000000)-0.01500 = 25.80%
Money Market Fund ((1.046660-1.000000)/1.000000)-0.01500 = 3.17%
Since Inception of Underlying Portfolio
5 Years With Complete Withdrawal
Equity Index Fund (((2.747693/1.000000)^(.200000))-1)-0.01500 = 20.90%
Money Market Fund (((1.238946/1.000000)^(.200000))-1)-0.01500 = 2.88%
Since Inception of Underlying Portfolio
10 Years or Since Inception With Complete Withdrawal
Equity Index Fund (((4.426309/1.000000)^(365/3016))-1)-0.01500 = 18.22%
Money Market Fund (((1.594350/1.000000)^(0.100000))-1)-0.01500 = 3.28%
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