<PAGE>
File Number 333-63087
811-8116
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 14
ALLMERICA SELECT SEPARATE ACCOUNT 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)
Abigail M. Armstrong, Secretary and Counsel
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 CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("the 1933
Act"). No filing fee is submitted as a filing fee is not required for this
type of filing.
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
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1.............................. Cover Page
2.............................. Special Terms
3.............................. Summary; Annual and Transaction Expenses
4.............................. Condensed Financial Information;
Performance Information
5.............................. Description of the Companies, the Variable
Account, the Trust, Fidelity VIP and
T. Rowe Price.
6.............................. Charges and Deductions
7.............................. Description of the Contract
8.............................. Electing the Form of Annuity and the Annuity
Date; Description of Variable Annuity Payout
Options; Annuity Benefit Payments
9.............................. Death Benefit
10 ............................ Payments; Computation of Values; Distribution
11 ............................ Surrender; Withdrawals; Texas Optional
Retirement Program
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
- ----------------- ----------------------------------------------
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
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
ALLMERICA SELECT CHARTER
VARIABLE ANNUITY CONTRACT
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE
, IMPORTANT POINTS THAT YOU SHOULD KNOW AND CONSIDER
1998 BEFORE PURCHASING THE ALLMERICA SELECT CHARTER
VARIABLE ANNUITY CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED LATER IN THIS PROSPECTUS. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE ALLMERICA SELECT CHARTER VARIABLE ANNUITY CONTRACT
The Allmerica Select Charter variable annuity contract is a contract between you
and Allmerica Financial Life Insurance and Annuity Company (for contracts issued
in the District of Columbia, Puerto Rico, the Virgin Islands and any state
except Hawaii and New York) or First Allmerica Financial Life Insurance Company
(for contracts issued in Hawaii and New York). It is designed to help you
accumulate assets for your retirement or other important financial goals on a
tax-deferred basis.
The Allmerica Select Charter variable annuity contract offers a diverse
selection of money managers and investment options. You may allocate your
payments among any of 14 variable investment portfolios, a number of Guarantee
Period Accounts and the Fixed Account. This range of investment choices enables
you to allocate your money to meet your particular investment needs. Transfers
between accounts do not create a taxable event.
Variable investments are subject to fluctuations in market value, and may
increase or decrease the value of your contract over time. Investments in either
the Fixed Account or the Guarantee Period Accounts offer rates of return and
protection of principal that are guaranteed by the Company.
Annuities typically have two phases; an ACCUMULATION PHASE and, if you
annuitize, an ANNUITY PAYOUT PHASE. During the ACCUMULATION PHASE you can make
payments into the contract on any frequency. Earnings from your investments
accumulate on a tax-deferred basis. Withdrawals from your contract during the
ACCUMULATION PHASE are subject to taxes on earnings and any pre-tax payments
made to the contract when you withdraw them. A federal tax penalty may apply if
you take a withdrawal prior to age 59 1/2. The ANNUITY PAYOUT PHASE occurs when
you, or the payee you designate, begin receiving regular annuity benefit
payments from your contract. The amount of money you are able to accumulate in
your contract during the ACCUMULATION PHASE will determine the amount of the
annuity benefit payments during the ANNUITY PAYOUT PHASE. This accumulation is
based on the amount of your payments, and any gain or loss from your
investments.
2. ANNUITY PAYMENTS
Before you, or the payee you designate, begin to receive payments from your
annuity, you will want to decide the form those payments will take. For a
regular income from your annuity, you may select one of six annuity options: (1)
periodic payments for the annuitant's lifetime; (2) periodic payments for the
annuitant's lifetime, but not for less than 120 months; (3) periodic payments
for the annuitant's lifetime with the guarantee that if payments are less than
the accumulated value a refund of the remaining value will be paid: (4) periodic
payments for the annuitant's lifetime and one other individual's (i.e. the
beneficiary or a joint annuitant) lifetime;
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(5) periodic payments for the annuitant's lifetime and one other individual's
lifetime with the payment during the lifetime of the survivor being reduced to
2/3; and (6) periodic payments for a specified period of 1 to 30 years.
You can also choose whether you want the annuity benefit payments on a variable
basis (subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once annuity benefit payments begin, the annuity
option cannot be changed.
3. PURCHASING THIS CONTRACT
Allmerica Select Charter contracts are sold through a network of independent
financial representatives. We suggest you and your representative review this
information and that your representative assist you in completing any forms. The
initial payment into this contract must be at least $25,000 and each subsequent
payment must be at least $100. Other than these conditions, there is no fixed
schedule for making payments, nor any limits as to payment frequency.
4. INVESTMENT OPTIONS
You have full investment control over the contract and you may allocate money to
the following funds:
<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
--------------------------------------------- ---------------------------------------------
<S> <C> <C>
International Funds Select Emerging Markets Fund Schroder Capital Management International
Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.)
Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Aggressive Growth Funds Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Growth Funds Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Growth and Income Funds Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
High Income Fund Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Income Fund Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Money Market Fund Allmerica Asset Management, Inc.
</TABLE>
You may also allocate money among the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts offer interest rates that are guaranteed
for a specific period of time. The Fixed Account guarantees a minimum rate of
interest which may vary from time to time but will not be less than 3%.
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5. EXPENSES
The contract has insurance features and investment features, and there are
costsrelated to each. Each year a $35 contract fee is deducted from your
contract. This charge is waived if the value of the contract is at least
$75,000. (This fee may vary by state. See your contract for more information.)
Also, insurance charges are deducted which total 1.40% of the average daily
value of amounts allocated to the investment portfolios.
There are also investment management charges which range from 0.35% to 2.00% of
the average daily value of the investment portfolio depending upon the
investment portfolio. When you make a withdrawal or you, or the payee you
designate, begin receiving regular annuity benefit payments from your annuity, a
state premium tax, which varies depending upon the state of residency, may
apply.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" combines the contract fee (which is
represented as 0.04%), the 1.40% insurance charges and the investment charges
for each fund. The next two columns show two examples of the charges you would
pay in dollar amounts. The examples assume you invest $1,000, earn 5% annually
and withdraw your money: (1) at the end of year 1, and (2) at the end of year
10. Year 1 includes Total Annual Charges for one year. Year 10, shows the
aggregate of all the annual charges assessed for 10 years. Premium tax is
assumed to be 0% in both examples.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
EXAMPLES:
TOTAL ANNUAL
EXPENSES AT
END OF
------------------------
TOTAL ANNUAL TOTAL ANNUAL TOTAL ANNUAL (1) (2)
FUND INSURANCE CHARGES FUND CHARGES CHARGES 1 YEAR 10 YEARS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Select Emerging Markets Fund*........ 1.44% 2.00% 3.44% $ 34 $ 369
Select International Equity Fund..... 1.44% 1.12% 2.56% $ 26 $ 286
T. Rowe Price International Stock
Portfolio.......................... 1.44% 1.05% 2.49% $ 25 $ 279
Select Aggressive Growth Fund........ 1.44% 0.98% 2.42% $ 24 $ 272
Select Capital Appreciation Fund..... 1.44% 1.10% 2.54% $ 25 $ 284
Select Value Opportunity Fund........ 1.44% 1.04% 2.48% $ 25 $ 278
Select Growth Fund................... 1.44% 0.93% 2.37% $ 24 $ 267
Select Strategic Growth Fund*........ 1.44% 0.98% 2.42% $ 24 $ 272
Fidelity VIP Growth Portfolio........ 1.44% 0.69% 2.13% $ 21 $ 243
Select Growth and Income Fund........ 1.44% 0.77% 2.21% $ 22 $ 251
Fidelity VIP Equity-Income
Portfolio.......................... 1.44% 0.58% 2.02% $ 20 $ 231
Fidelity VIP High Income Portfolio... 1.44% 0.71% 2.15% $ 22 $ 245
Select Income Fund................... 1.44% 0.71% 2.15% $ 22 $ 245
Money Market Fund.................... 1.44% 0.35% 1.79% $ 18 $ 207
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* For newly formed funds, fund expenses have been estimated.
The charges reflect any applicable expense reimbursements and/or fee waivers.
They do not reflect the optional Enhanced Death Benefit Rider charge of 0.25%
which, if elected, would increase expenses. For more detailed information, see
the Fund Expense Table in the Prospectus.
6. TAXES
Your earnings are not taxed until you take them out under current tax rules. Any
withdrawals during the accumulation phase will be first treated as earnings and
are taxed as income. If you take money out before age 59 1/2, you may be subject
to a 10% federal tax penalty on the earnings. Payments during the annuity payout
phase are considered partly a return of your original investment. The "original
investment" part of each payment is not taxable as income. However, if this
contract is used as part of a qualified retirement program (such as a 401(k)
plan), then the entire income payment will be taxable.
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7. WITHDRAWALS
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100.
Amounts allocated to the Guarantee Period Account will be subject to a market
value adjustment, which may increase or decrease the value if withdrawn before
the end of the guarantee period.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the funds you choose. The following chart illustrates past
returns for the funds since the inception of each Sub-Account. The performance
figures reflect the contract fee, the insurance charges, the investment charges
and all other expenses of the fund. They do not reflect the optional Enhanced
Death Benefit Rider charge of 0.25% which, if elected, would reduce performance.
Past performance is not a guarantee of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
ALLMERICA FINANCIAL LIFE INSURANCE ---------------------------------------------------------------
AND ANNUITY COMPANY FUND 1997 1996 1995 1994 1993
- ----------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Select Emerging Markets Fund............................... N/A N/A N/A N/A N/A
Select International Equity Fund........................... 3.16% 20.20% 17.94% -4.30% N/A
T. Rowe Price International Stock Portfolio................ 1.63% 12.99% 9.57% N/A N/A
Select Aggressive Growth Fund.............................. 17.03% 16.85% 30.44% -3.52% 17.82%
Select Capital Appreciation Fund........................... 12.66% 7.24% N/A N/A N/A
Select Value Opportunity Fund.............................. N/A N/A N/A N/A N/A
Select Growth Fund......................................... 32.18% 20.27% 22.83% -2.95% -0.32%
Select Strategic Growth Fund............................... N/A N/A N/A N/A N/A
Fidelity VIP Growth Portfolio.............................. 21.74% 13.06% 33.41% N/A N/A
Select Growth and Income Fund.............................. 20.79% 19.53% 28.50% -0.78% 8.81%
Fidelity VIP Equity-Income Portfolio....................... 26.30% 12.64% 33.15% N/A N/A
Fidelity VIP High Income Portfolio......................... 16.01% 12.40% 18.98% N/A N/A
Select Income Fund......................................... 7.62% 1.82% 15.31% -6.16% 9.35%
Money Market Fund.......................................... 3.97% 3.83% 4.33% 2.51% 1.55%
</TABLE>
<TABLE>
<CAPTION>
CALENDAR YEAR
FIRST ALLMERICA FINANCIAL LIFE -------------------------------------
INSURANCE COMPANY FUND 1997 1996 1995
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Select Emerging Markets Fund...................................................... N/A N/A N/A
Select International Equity Fund.................................................. 3.16% 20.20% 17.94%
T. Rowe Price International Stock Portfolio....................................... 1.63% 12.99% 9.57%
Select Aggressive Growth Fund..................................................... 17.03% 16.85% 30.44%
Select Capital Appreciation Fund.................................................. 12.66% 7.24% N/A
Select Value Opportunity Fund..................................................... N/A N/A N/A
Select Growth Fund................................................................ 32.18% 20.27% 22.83%
Select Strategic Growth Fund...................................................... N/A N/A N/A
Fidelity VIP Growth Portfolio..................................................... 21.74% 13.06% 33.41%
Select Growth and Income Fund..................................................... 20.79% 19.53% 28.50%
Fidelity VIP Equity-Income Portfolio.............................................. 26.30% 12.64% 33.15%
Fidelity VIP High Income Portfolio................................................ 16.01% 12.40% 18.98%
Select Income Fund................................................................ 7.62% 1.82% 15.31%
Money Market Fund................................................................. 3.97% 3.83% 4.33%
</TABLE>
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9. DEATH BENEFIT
In addition to tax deferred growth, your contract provides valuable insurance
features. If you, a joint owner or (in the event that the owner is a non-natural
person) an annuitant dies during the accumulation phase, we will pay the
beneficiary a death benefit. The death benefit will be equal to the GREATER of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) gross payments, decreased proportionately to reflect withdrawals. You may
also purchase a rider that will enhance the death benefit (see "Optional
Enhanced Death Benefit Rider" below).
10. ADDITIONAL FEATURES
OPTIONAL ENHANCED DEATH BENEFIT RIDER: -- This optional rider is available for a
separate monthly charge. Under this rider:
I. If an owner (or an annuitant if the owner is a non-natural person) dies
during the accumulation phase and before the oldest owner's 90th birthday, the
death benefit will be equal to the GREATEST of:
(a) the accumulated value increased by any positive market value adjustment (the
"accumulated value"); or
(b) gross payments compounded daily at an annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (5% compounding not available in Hawaii and New York); or
(c) the highest accumulated value of all contract anniversaries, as determined
after the accumulated value of each contract anniversary is increased for
subsequent payments and decreased proportionately for subsequent
withdrawals.
The (c) value is determined on each contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an owner (or an annuitant if the owner is a non-natural person) dies
during the accumulation phase but after the oldest owner's 90th birthday, the
death benefit will be equal to the GREATER of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the contract anniversary immediately prior to the oldest owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
FREE LOOK PERIOD: -- If you cancel your contract within 10 days after receiving
it (or whatever period is required by your state), we will provide you with a
refund in accordance with the terms of the contract's "Right to Examine
Contract" provision.
DOLLAR COST AVERAGING: -- You may elect to automatically transfer money on a
periodic basis from the Money Market Fund, Select Income Fund or Fixed Account
to one or more of the other investment options. There is no charge for this
service.
AUTOMATIC ACCOUNT REBALANCING: -- You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
There is no charge for this service.
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11. INQUIRIES
If you need more information you may contact us at 1-800-366-1492 or send
correspondence to:
Allmerica Select
Allmerica Financial
P.O. Box 8179
Boston, Massachusetts 02266-8179
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY, WORCESTER, MA
FIRST ALLMERICA LIFE INSURANCE COMPANY, WORCESTER, MA
COMBINATION DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
ALLMERICA SELECT SEPARATE ACCOUNT
This Prospectus describes interests under flexible payment combination deferred
variable and fixed annuity contracts issued, either on a group basis or as
individual contracts, by Allmerica Financial Life Insurance and Annuity Company
(for contracts issued in the District of Columbia, Puerto Rico, the Virgin
Islands and any state except Hawaii and New York) or by First Allmerica
Financial Life Insurance Company (for contracts issued in Hawaii and New York)
to individuals and businesses in connection with retirement plans or other
long-term plans. (For information about the tax status when used with a
particular type of plan, see "FEDERAL TAX CONSIDERATIONS.") Participation in a
group contract will be accounted for by the issuance of a certificate while
participation in an individual contract will be evidenced by the issuance of an
individual contract. Certificates and individual contracts are referred to
herein collectively as the "Contract(s)." Unless otherwise specified, any
reference to the "Company" in this Prospectus shall refer exclusively to
Allmerica Financial Life Insurance and Annuity Company for contracts issued in
the District of Columbia, Puerto Rico, the Virgin Islands and any state except
Hawaii and New York, and exclusively to First Allmerica Financial Life Insurance
Company for contracts issued in Hawaii and New York. The following is a summary
of information about these Contracts. More detailed information can be found
under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as the Allmerica Select Separate Account. The assets of the
Variable Account are divided into Sub-Accounts, each investing exclusively in
shares of one of the following funds:
<TABLE>
<CAPTION>
Fund Investment Adviser
- ---------------------------------- ----------------------------------------
<S> <C>
SELECT EMERGING MARKETS FUND SCHRODER CAPITAL MANAGEMENT
INTERNATIONAL INC.
SELECT INTERNATIONAL EQUITY FUND BANK OF IRELAND ASSET MANAGEMENT (U.S.)
LIMITED
T. ROWE PRICE INTERNATIONAL STOCK ROWE PRICE-FLEMING INTERNATIONAL, INC.
PORTFOLIO
SELECT AGGRESSIVE GROWTH FUND NICHOLAS-APPLEGATE CAPITAL MANAGEMENT,
L.P.
SELECT CAPITAL APPRECIATION FUND T. ROWE PRICE ASSOCIATES, INC.
SELECT VALUE OPPORTUNITY FUND CRAMER ROSENTHAL MCGLYNN, LLC
SELECT GROWTH FUND PUTNAM INVESTMENT MANAGEMENT, INC.
SELECT STRATEGIC GROWTH FUND CAMBIAR INVESTORS, INC.
FIDELITY VIP GROWTH PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT GROWTH AND INCOME FUND JOHN A. LEVIN & CO., INC.
FIDELITY VIP EQUITY-INCOME FIDELITY MANAGEMENT & RESEARCH COMPANY
PORTFOLIO
FIDELITY VIP HIGH INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT INCOME FUND STANDISH, AYER & WOOD, INC.
MONEY MARKET FUND ALLMERICA ASSET MANAGEMENT, INC.
</TABLE>
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account and, during the
accumulation period, to one or more of the Company's Guarantee Period Accounts.
Amounts allocated to the Fixed Account earn interest at a guaranteed rate for
one year from the date allocated. Amounts allocated to a Guarantee Period
Account earn a fixed rate of interest for the duration of the applicable
Guarantee Period. The interest earned is guaranteed if held for the entire
Guarantee Period. If withdrawn or transferred prior to the end of the Guarantee
Period, the value may be increased or decreased by a Market Value Adjustment.
Assets supporting allocations to the Guarantee Period Accounts in the
accumulation phase are held in the Company's Separate Account GPA.
The Company offers other variable annuity contracts which also invest in many of
the same Funds. These contracts may have different charges that could affect
contract performance, and may offer different benefits more suitable to your
needs. To obtain information about these contracts, contact your financial
representative.
This Prospectus sets forth the information that a prospective investor ought to
know before investing. Additional information is contained in a Statement of
Additional Information dated , 1998, filed with the Securities and
Exchange Commission and incorporated herein by reference. The Table of Contents
of the Statement of Additional Information ("SAI") is on page 4 of this
Prospectus. The SAI is available upon request and without charge through
Allmerica Investments, Inc., Telephone 1-800-366-1492. In addition, the SEC
maintains a website, www.sec.gov., that contains the SAI as well as material
incorporated by reference related to this Prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND AND T. ROWE PRICE
INTERNATIONAL SERIES, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO INVESTS IN
HIGHER-YIELDING, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES AND
POLICIES"). INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED , 1998
<PAGE>
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY (FOR CONTRACTS ISSUED IN THE DISTRICT OF COLUMBIA, PUERTO RICO, THE
VIRGIN ISLANDS AND ANY STATE EXCEPT HAWAII AND NEW YORK) OR FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY (FOR CONTRACTS ISSUED IN HAWAII AND NEW YORK),
AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS................................... 4
SPECIAL TERMS........................................................................... 5
SUMMARY................................................................................. 7
ANNUAL AND TRANSACTION EXPENSES......................................................... 13
CONDENSED FINANCIAL INFORMATION......................................................... 16
PERFORMANCE INFORMATION................................................................. 19
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNT, THE TRUST, FIDELITY VIP AND T. ROWE
PRICE.................................................................................. 22
INVESTMENT OBJECTIVES AND POLICIES...................................................... 24
INVESTMENT ADVISORY SERVICES............................................................ 26
DESCRIPTION OF THE CONTRACT............................................................. 28
A. Payments......................................................................... 28
B. Right to Cancel Individual Retirement Annuity.................................... 29
C. Right to Cancel All Other Contracts.............................................. 29
D. Transfer Privilege............................................................... 29
Automatic Transfers and Automatic Account Rebalancing Options................... 30
E. Surrender........................................................................ 31
F. Withdrawals...................................................................... 32
Systematic Withdrawals.......................................................... 32
Life Expectancy Distributions................................................... 32
G. Death Benefit.................................................................... 33
Death of an Owner Prior to the Annuity Date..................................... 33
Optional Enhanced Death Benefit Rider........................................... 33
Payment of the Death Benefit Prior to the Annuity Date.......................... 34
H. The Spouse of the Owner as Beneficiary........................................... 34
I. Assignment....................................................................... 35
J. Electing the Form of Annuity and the Annuity Date................................ 35
K. Description of Variable Annuity Payout Options................................... 36
L. Annuity Benefit Payments......................................................... 37
The Annuity Unit................................................................ 37
Determination of the First and Subsequent Annuity Benefit Payments.............. 37
M. NORRIS Decision................................................................... 38
N. Computation of Values............................................................ 38
The Accumulation Unit........................................................... 38
Net Investment Factor........................................................... 39
CHARGES AND DEDUCTIONS.................................................................. 39
A. Variable Account Deductions...................................................... 39
Mortality and Expense Risk Charge............................................... 39
Administrative Expense Charge................................................... 40
Other Charges................................................................... 40
B. Contract Fee..................................................................... 40
C. Optional Enhanced Death Benefit Rider Charge..................................... 40
D. Premium Taxes.................................................................... 41
E. Transfer Charge.................................................................. 41
GUARANTEE PERIOD ACCOUNTS............................................................... 41
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
FEDERAL TAX CONSIDERATIONS.............................................................. 43
A. Qualified and Non-Qualified Contracts............................................ 44
B. Taxation of the Contracts in General............................................. 44
Withdrawals Prior to Annuitization.............................................. 44
Annuity Payouts After Annuitization............................................. 45
Penalty on Distribution......................................................... 45
Assignments or Transfers........................................................ 45
Non-Natural Owners.............................................................. 45
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations................................................................... 45
C. Tax Withholding.................................................................. 46
D. Provisions Applicable to Qualified Employer Plans................................ 46
Corporate and Self-Employed Pension and Profit Sharing Plans.................... 46
Individual Retirement Annuities................................................. 46
Tax-Sheltered Annuities......................................................... 47
Texas Optional Retirement Program............................................... 47
REPORTS................................................................................. 47
LOANS (QUALIFIED CONTRACTS ONLY)........................................................ 47
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................... 47
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................... 48
VOTING RIGHTS........................................................................... 48
DISTRIBUTION............................................................................ 49
SERVICES................................................................................ 49
LEGAL MATTERS........................................................................... 49
FURTHER INFORMATION..................................................................... 51
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................................. A-1
APPENDIX B -- THE MARKET VALUE ADJUSTMENT............................................... B-1
APPENDIX C -- THE DEATH BENEFIT......................................................... C-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES................................................................................ 3
UNDERWRITERS............................................................................ 3
ANNUITY BENEFIT PAYMENTS................................................................ 4
PERFORMANCE INFORMATION................................................................. 5
FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract 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 on which annuity benefit payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
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 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
non-unitized separate account.
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 the
Guarantee Period Account assessed if any portion of a Guarantee Period Account
is withdrawn or transferred prior to the end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
an Annuitant and, unless otherwise indicated, any reference to Owner shall
include Joint Owners.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding fund of
Allmerica Investment Trust, a corresponding portfolio of the Variable Insurance
Products Fund ("Fidelity VIP"), or the T. Rowe Price International Stock
Portfolio of T. Rowe Price International Series, Inc. ("T. Rowe Price").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee and Market Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): Select Emerging Markets Fund and Select
International Equity Fund of Allmerica Investment Trust, T. Rowe Price
International Stock Portfolio of T. Rowe Price International
5
<PAGE>
Series, Inc., Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Value Opportunity Fund, Select Growth Fund and Select Strategic Growth
Fund of Allmerica Investment Trust, Fidelity VIP Growth Portfolio of Variable
Insurance Products Fund, Select Growth and Income Fund of Allmerica Investment
Trust, Fidelity VIP Equity-Income Portfolio and Fidelity VIP High Income
Portfolio of Variable Insurance Products Fund, Select Income Fund, and Money
Market Fund of Allmerica Investment Trust.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, withdrawal or surrender of a Contract was received)
when there is a sufficient degree of trading in an Underlying Fund's portfolio
securities such that the current net asset value of the Sub-Accounts may be
affected materially.
VARIABLE ACCOUNT: Allmerica Select Separate Account, one of the Company's
separate accounts, consisting of assets segregated from other assets of the
Company. The investment performance of the assets of the Variable Account is
determined separately from the other assets of the Company and are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
VARIABLE ANNUITY PAYOUT: an annuity payout option providing for payments varying
in amount in accordance with the investment experience of certain of the
Underlying Funds.
6
<PAGE>
SUMMARY
WHAT IS THE ALLMERICA SELECT CHARTER VARIABLE ANNUITY?
The Allmerica Select Charter variable annuity 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 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;
- income that can be guaranteed for life;
- issue age up to the 90th birthday of the oldest person among the Owner(s)
and the Annuitant(s).
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated to the
combination of portfolios of securities ("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 Funds
and any accumulations in the Guarantee Period and Fixed Accounts. No income
taxes are paid on any earnings under the Contract unless and until Accumulated
Values are withdrawn. In addition, during the accumulation phase, your
beneficiaries receive certain protections and guarantees in the event of your
death. See discussion below "WHAT HAPPENS UPON DEATH DURING 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 several annuity payout options. You choose the annuity payout
option and the date for annuity benefit payments to begin. You also decide
whether you want variable annuity benefit payments based on the investment
performance of certain Funds, fixed-amount annuity benefit payments with payment
amounts guaranteed by the Company, or a combination of fixed-amount and variable
annuity benefit payments. Among the payout options available during the annuity
payout phase are:
- periodic payments for the Annuitant's lifetime;
- periodic payments for the Annuitant's life and the life of another person
selected by you;
- periodic payments for the Annuitant's lifetime with guaranteed payments
continuing for 10 years in the event that the Annuitant dies before the
end of ten years;
- periodic payments over a specified number of years (1 to 30) -- under this
option you may reserve the right to convert remaining payments to a
lump-sum payout by electing a "commutable" option.
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 the District of Columbia,
Puerto Rico, the Virgin Islands and any state except Hawaii and New York) or
First Allmerica Financial Life Insurance Company (for contracts issued in Hawaii
and New York). Unless otherwise specified, any reference to the "Company" in
this Prospectus shall refer exclusively to Allmerica Financial Life Insurance
and Annuity Company for contracts issued in the District of Columbia, Puerto
Rico, the Virgin Islands and any state except Hawaii and New York and to First
7
<PAGE>
Allmerica Financial Life Insurance Company for contracts issued in Hawaii and
New York. Each Contract has an Owner (or an Owner and a Joint Owner, in which
case one of the two must be an Annuitant), an Annuitant (or an Annuitant and a
Joint Annuitant) and one or more beneficiaries. As Owner, you make payments,
choose investment allocations, receive annuity benefit payments (or designate
someone else to receive annuity benefit payments) and select the Annuitant and
beneficiary. When a Contract is owned jointly, the consent of both Owners is
required in order to exercise any ownership rights. The Annuitant is the
individual upon whose continuation of life annuity benefit payments involving
life contingency depend. An Annuitant may be changed at any time after issue of
the Contract and prior to the Annuity Date, unless (1) the Owner is a non-
natural person or (2) you are taking life expectancy distributions. For more
information about life expectancy distributions, see "F. Withdrawals." At all
times there must be at least one Annuitant. If an Annuitant dies and a
replacement is not named, you will become the new Annuitant. The beneficiary is
the person, persons or entity entitled to the death benefit prior to the Annuity
Date and who, under certain circumstances, 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?
The number and frequency of your payments are flexible, subject only to a
$25,000 minimum for your initial payment and a $100 minimum for any additional
payments. In addition, a minimum of $1,000 is always required to establish a
Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
The Contract currently permits net payments to be allocated among the
Sub-Accounts investing in the Funds, the Guarantee Period Accounts, and the
Fixed Account.
THE SUB-ACCOUNTS INVEST IN THE FOLLOWING FOURTEEN FUNDS:
- Select Emerging Markets Fund
Managed by Schroder Capital Management International Inc.
- Select International Equity Fund
Managed by Bank of Ireland Asset Management (U.S.) Limited
- T. Rowe Price International Stock Portfolio
Managed by Rowe Price-Fleming International, Inc.
- Select Aggressive Growth Fund
Managed by Nicholas-Applegate Capital Management, L.P.
- Select Capital Appreciation Fund
Managed by T. Rowe Price Associates, Inc.
- Select Value Opportunity Fund
Managed by Cramer Rosenthal McGlynn, LLC
- Select Growth Fund
Managed by Putnam Investment Management, Inc.
- Select Strategic Growth Fund
Managed by Cambiar Investors, Inc.
- Fidelity VIP Growth Portfolio
Managed by Fidelity Management & Research Company
8
<PAGE>
- Select Growth and Income Fund
Managed by John A. Levin & Co., Inc.
- Fidelity VIP Equity-Income Portfolio
Managed by Fidelity Management & Research Company
- Fidelity VIP High Income Portfolio
Managed by Fidelity Management & Research Company
- Select Income Fund
Managed by Standish, Ayer & Wood, Inc.
- Money Market Fund
Managed by Allmerica Asset Management, Inc.
CERTAIN FUNDS MAY NOT BE AVAILABLE IN ALL STATES.
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. 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
account's 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 MAY NOT BE AVAILABLE IN ALL STATES.
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."
WHO ARE THE INVESTMENT ADVISERS OF THE FUNDS AND HOW ARE THEY SELECTED?
BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension consulting firm,
assists the Company in the selection of the Contract's Funds. In addition, BARRA
RogersCasey assists the Trust in the selection of investment advisers for the
Funds of the Trust. BARRA RogersCasey provides consulting services to pension
plans representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey is wholly-controlled by BARRA, Inc. As a consultant,
BARRA RogersCasey has no discretionary or decision-making authority with respect
to the Funds, and has no responsibility for any investment advice or other
services provided to the Funds by Allmerica Financial Investment Management
Services, Inc. ("Manager") or the investment advisers.
9
<PAGE>
The Manager, an affiliate of the Company, is the investment manager of the
Trust. The Manager has entered into agreements with investment advisers
("Sub-Advisers") selected by the Manager and the Trustees in consultation with
BARRA RogersCasey. Each Sub-Adviser is selected by using strict objective,
quantitative, and qualitative criteria, with special emphasis on the
Sub-Adviser's record in managing similar portfolios. In consultation with BARRA
RogersCasey, a committee monitors and evaluates the ongoing performance of all
of the Funds. The committee may recommend the replacement of a Sub-Adviser of
one of the Funds of the Trust, or the addition or deletion of any other Funds.
The committee includes members who may be affiliated or unaffiliated with the
Company and the Trust. The Sub-Advisers (other than Allmerica Asset Management,
Inc.) are not affiliated with the Company or the Trust.
Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Roger Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $30 billion under management in its offices in Baltimore, London,
Tokyo, Hong Kong, Singapore and Buenos Aires.
The following are the investment advisers of the Funds:
<TABLE>
<CAPTION>
Fund Investment Adviser
- -----------------------------------------------------------------------------------------
<S> <C>
SELECT EMERGING MARKETS FUND SCHRODER CAPITAL MANAGEMENT INTERNATIONAL INC.
SELECT INTERNATIONAL EQUITY FUND BANK OF IRELAND ASSET MANAGEMENT (U.S.) LIMITED
T. ROWE PRICE INTERNATIONAL STOCK ROWE PRICE-FLEMING INTERNATIONAL, INC.
PORTFOLIO
SELECT AGGRESSIVE GROWTH FUND NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, L.P.
SELECT CAPITAL APPRECIATION FUND T. ROWE PRICE ASSOCIATES, INC.
SELECT VALUE OPPORTUNITY FUND CRAMER ROSENTHAL MCGLYNN, LLC
SELECT GROWTH FUND PUTNAM INVESTMENT MANAGEMENT, INC.
SELECT STRATEGIC GROWTH FUND CAMBIAR INVESTORS, INC.
FIDELITY VIP GROWTH PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT GROWTH AND INCOME FUND JOHN A. LEVIN & CO., INC.
FIDELITY VIP EQUITY-INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
FIDELITY VIP HIGH INCOME PORTFOLIO FIDELITY MANAGEMENT & RESEARCH COMPANY
SELECT INCOME FUND STANDISH, AYER & WOOD, INC.
MONEY MARKET FUND ALLMERICA ASSET MANAGEMENT, INC.
</TABLE>
CAN I MAKE TRANSFERS AMONG THE SUB-ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Funds, the Guarantee Period Accounts, and the Fixed Account.
You will incur no current taxes on transfers while your money remains in the
Contract. See "TRANSFER PRIVILEGE." 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. As of the date of
this Prospectus, transfers may be made to all of the current Sub-Accounts during
the life of the Contract and prior to the Annuity Date. However, should
additional Funds be added to the Contract, the Company reserves the right to
limit the number of Sub-Accounts to which transfers may be made.
10
<PAGE>
WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. A 10% tax penalty may apply on all amounts deemed to be
earnings if you are under age 59 1/2. (A Market Value Adjustment may apply to
any withdrawal made from a Guarantee Period Account prior to the expiration of
the Guarantee Period.)
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If you, a Joint Owner or (in the event that the Owner is a non-natural person)
an Annuitant should die prior to the Annuity Date, a death benefit will be paid
to the beneficiary.
The standard death benefit will be equal to the GREATER of:
- The Accumulated Value increased by any positive Market Value Adjustment;
or
- Gross payments, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior
to the withdrawal).
An optional Enhanced Death Benefit Rider is available for a separate monthly
charge. See "G. Death Benefit" under "DESCRIPTION OF THE CONTRACT." Under the
Enhanced Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a non-natural person) dies prior
to the Annuity Date and before the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment (the
"Accumulated Value"); or
(b) gross payments compounded daily at an annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (5% compounding not available in Hawaii and New York); or
(c) the highest Accumulated Value of all Contract anniversaries, as determined
after the Accumulated Value of each contract anniversary is increased for
subsequent payments and decreased proportionately for subsequent
withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a non-natural person) dies
prior to the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
11
<PAGE>
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $75,000 on each Contract anniversary and
upon surrender, a $35 Contract fee will be deducted from your Contract. (This
fee may vary by state. See your Contract for more information.)
A deduction for state and local premium taxes, if any, may be made as described
under "Premium Taxes."
The Company will deduct a daily Mortality and Expense Risk Charge and a daily
Administrative Expense Charge Equal to an annual rate of 1.25% and 0.15%,
respectively, of the average daily net assets invested in each Fund. The Funds
will incur certain management fees and expenses which are more fully described
in "Other Charges" and in the prospectuses of the Underlying Funds, which
accompany this Prospectus.
An optional rider (Enhanced Death Benefit Rider) is available for an additional
charge equal to an annual rate of 0.25% which is deducted on the last day of
each month and on the date the rider is terminated. For more information, see
"G. Death Benefit" under "DESCRIPTION OF THE CONTRACT" and see "CHARGES AND
DEDUCTIONS."
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 states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the
Sub-Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires, or if the Contract was issued as an Individual Retirement
Annuity (IRA) you will generally receive a refund of your entire payment. In
certain states this refund may be the greater of (1) your entire payment or (2)
the amounts allocated to the Fixed and the Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted. See "B. Right to Cancel Individual Retirement Annuity" and
"C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans.
- You may change an Annuitant at any time after Contract issue and prior to
the Annuity Date, unless the Owner is a non-natural person and except
while taking life expectancy distributions.
- You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- You may change your allocation of payments.
- You may make transfers among your accounts prior to the Annuity Date
without any tax consequences.
- You may cancel your Contract within ten days of delivery (or longer if
required by state law).
12
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and are deducted as
described under "Premium Taxes."
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES: CHARGE
- -------------------------------------------------------- ------------
<S> <C> <C>
Sales Charge Imposed on Payments: None
Deferred Sales Charge: None
<CAPTION>
CONTRACT CHARGES:
- --------------------------------------------------------
<S> <C> <C>
TRANSFER CHARGE: None
The Company currently makes no 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.
CONTRACT FEE: $35 *
The fee is deducted annually and upon surrender prior to
the Annuity Date when Accumulated Value is less than
$75,000.
<CAPTION>
OPTIONAL RIDER CHARGE:
<S> <C> <C>
(on an annual basis as percentage of Accumulated Value)
Optional Enhanced Death Benefit Rider 0.25%**
<CAPTION>
SUB-ACCOUNT EXPENSES:
- --------------------------------------------------------
<S> <C> <C>
(on annual basis as percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
-----
Total Asset Charge: 1.40%
</TABLE>
* This fee may vary by state. See your Contract for more information.
** If the rider is elected, this annual charge is deducted on a monthly basis at
the end of each month within which the rider was in effect.
13
<PAGE>
FUND EXPENSES: The following table shows the expenses of the Underlying Funds as
a percentage of average net assets for the year ended December 31, 1997.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER FUND
(AFTER ANY WAIVERS/ EXPENSES (AFTER ANY TOTAL FUND
FUND REIMBURSEMENTS) APPLICABLE REIMBURSEMENTS) EXPENSES
<S> <C> <C> <C>
Select Emerging Markets Fund@...................... 1.35% 0.65% 2.00%(1)
Select International Equity Fund................... 0.92%* 0.20% 1.12%(1)(3)
T. Rowe Price International Stock Portfolio........ 1.05% 0.00% 1.05%
Select Aggressive Growth Fund...................... 0.89%* 0.09% 0.98%(1)(3)
Select Capital Appreciation Fund................... 0.95%* 0.15% 1.10%(1)
Select Value Opportunity Fund...................... 0.90%** 0.14% 1.04%(1)(3)
Select Growth Fund................................. 0.85% 0.08% 0.93%(1)(3)
Select Strategic Growth Fund@...................... 0.85% 0.13% 0.98%(1)
Fidelity VIP Growth Portfolio...................... 0.60% 0.09% 0.69%(2)
Select Growth and Income Fund...................... 0.70%* 0.07% 0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio............... 0.50% 0.08% 0.58%(2)
Fidelity VIP High Income Portfolio................. 0.59% 0.12% 0.71%
Select Income Fund................................. 0.58%* 0.13% 0.71%(1)
Money Market Fund.................................. 0.27% 0.08% 0.35%(1)
</TABLE>
@ These Portfolios commenced operations in February 1998. Expenses shown are
annualized and are based on estimated amounts for the current fiscal year.
Actual expenses may be greater or less than shown.
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fees ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee for this fund has been voluntarily
limited to an annual rate of 0.90% of average daily net assets. The management
fee ratio shown above for the Select Value Opportunity Fund has been adjusted to
assume that the revised rate and the voluntary limitation took effect on January
1, 1997. Had the voluntary limitation of 0.90% not been effective on January 1,
1997 and had the management fee rate revision discussed above been effective on
January 1, 1997, the management fee ratio and the total fund expense ratio would
have been 0.95% and 1.09%, respectively.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("Manager"), under the Management Agreement with Allmerica Investment
Trust, has declared a voluntary expense limitation of 1.50% of average net
assets for Select International Equity Fund, 1.35% for Select Aggressive Growth
Fund and Select Capital Appreciation Fund, 1.25% for Select Value Opportunity
Fund, 1.20% for Select Strategic Growth and Select Growth Fund, 1.10% for Select
Growth and Income Fund, 1.00% for Select Income Fund and 0.60% for Money Market
Fund. In addition, the Manager has agreed to waive voluntarily its management
fee to the extent that expenses of the Select Emerging Markets Fund exceed 2.00%
of the Fund's average daily assets, except that such waiver shall not exceed the
net amount of management fees earned by the Manager from the fund after
subtracting fees paid by the Manager to Schroder Capital Management
International Inc. for sub-advisory fees. The total operating expenses of the
funds of the Trust were less than their respective expense limitations
throughout 1997. The declaration of a voluntary expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these funds.
(2) A portion of the brokerage commissions the Portfolio paid was used to reduce
Fund expenses. In addition, certain funds entered into arrangements with their
custodian and transfer agent whereby credits realized as a result of uninvested
cash balances were used to reduce custodian and transfer agent expenses.
Including these reductions, total operating expenses would have been 0.57% for
the Fidelity VIP Equity-Income Portfolio and 0.67% for the Fidelity VIP Growth
Portfolio.
(3) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expenses would have been 1.10% for Select
International Equity Fund, 0.91% for Select Growth Fund, 0.74% for Select Growth
and Income Fund, 0.93% for Select Aggressive Growth, and 0.98% for Select Value
Opportunity Fund.
14
<PAGE>
The following examples demonstrate the cumulative expenses which would be paid
by the Owner at 1-year, 3-year, 5-year and 10-year intervals with and without
the optional Enhanced Death Benefit Rider. 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 INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
(1) At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
optional Enhanced Death Benefit Rider:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $ 34 $ 105 $ 177 $ 369
Select International Equity Fund............................................. $ 26 $ 79 $ 134 $ 286
T. Rowe Price International Stock Portfolio.................................. $ 25 $ 77 $ 131 $ 279
Select Aggressive Growth Fund................................................ $ 24 $ 74 $ 127 $ 272
Select Capital Appreciation Fund............................................. $ 25 $ 78 $ 133 $ 284
Select Value Opportunity Fund................................................ $ 25 $ 76 $ 130 $ 278
Select Growth Fund........................................................... $ 24 $ 73 $ 125 $ 267
Select Strategic Growth Fund................................................. $ 24 $ 74 $ 127 $ 272
Fidelity VIP Growth Portfolio................................................ $ 21 $ 66 $ 113 $ 243
Select Growth and Income Fund................................................ $ 22 $ 68 $ 117 $ 251
Fidelity VIP Equity-Income Portfolio......................................... $ 20 $ 62 $ 107 $ 231
Fidelity VIP High Income Portfolio........................................... $ 22 $ 66 $ 114 $ 245
Select Income Fund........................................................... $ 22 $ 66 $ 114 $ 245
Money Market Fund............................................................ $ 18 $ 55 $ 95 $ 207
</TABLE>
(2) At the end of the applicable time period, you would pay the following
expenses on a $1000 investment, assuming a 5% annual return on assets and an
optional Enhanced Death Benefit Rider:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund................................................. $37 $112 $189 $392
Select International Equity Fund............................................. $28 $86 $147 $310
T. Rowe Price International Stock Portfolio.................................. $27 $84 $143 $304
Select Aggressive Growth Fund................................................ $27 $82 $140 $297
Select Capital Appreciation Fund............................................. $28 $86 $146 $308
Select Value Opportunity Fund................................................ $27 $84 $143 $303
Select Growth Fund........................................................... $26 $80 $137 $292
Select Strategic Growth Fund................................................. $27 $82 $140 $297
Fidelity VIP Growth Portfolio................................................ $24 $73 $125 $268
Select Growth and Income Fund................................................ $25 $76 $129 $276
Fidelity VIP Equity-Income Portfolio......................................... $23 $70 $120 $257
Fidelity VIP High Income Portfolio........................................... $24 $74 $126 $270
Select Income Fund........................................................... $24 $74 $126 $270
Money Market Fund............................................................ $20 $63 $108 $233
</TABLE>
As required in rules promulgated by the SEC, the Contract fee is reflected in
the examples by a method designated 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 not deducted after annuitization.
15
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY
Unit Value:
Beginning of Period............................... 1.357 1.128 0.956 1.000 N/A N/A
End of Period..................................... 1.400 1.357 1.128 0.956 N/A N/A
Units Outstanding at End of Period
(in thousands)..................................... 93,170 60,304 35,558 22,183 N/A N/A
T. ROWE PRICE INTERNATIONAL STOCK
Unit Value:
Beginning of Period............................... 1.203 1.065 1.000 N/A N/A N/A
End of Period..................................... 1.223 1.203 1.065 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)..................................... 33,977 16,510 4,066 N/A N/A N/A
SELECT AGGRESSIVE GROWTH
Unit Value:
Beginning of Period............................... 2.066 1.768 1.354 1.405 1.192 1.192
End of Period..................................... 2.419 2.066 1.768 1.354 1.405 1.192
Units Outstanding at End of Period
(in thousands)..................................... 81,233 64,262 51,006 36,330 17,538 5,123
SELECT CAPITAL APPRECIATION
Unit Value:
Beginning of Period............................... 1.484 1.383 1.000 N/A N/A N/A
End of Period..................................... 1.672 1.484 1.383 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)..................................... 43,733 24,257 5,424 N/A N/A N/A
SELECT GROWTH
Unit Value
Beginning of Period............................... 1.582 1.315 1.069 1.101 1.104 1.000
End of Period..................................... 2.091 1.582 1.315 1.069 1.101 1.104
Units Outstanding at End of Period
(in thousands)..................................... 98,533 68,193 53,073 38,752 20,366 5,246
FIDELITY VIP GROWTH
Unit Value:
Beginning of Period............................... 1.397 1.235 1.000 N/A N/A N/A
End of Period..................................... 1.701 1.397 1.235 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)..................................... 45,772 24,745 6,677 N/A N/A N/A
SELECT GROWTH AND INCOME
Unit Value:
Beginning of Period............................... 1.652 1.382 1.074 1.082 0.994 1.000
End of Period..................................... 1.996 1.652 1.382 1.074 1.082 0.994
Units Outstanding at End of Period
(in thousands)..................................... 106,800 77,919 61,942 43,292 20,983 22,339
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
FIDELITY VIP EQUITY-INCOME
Unit Value:
Beginning of Period............................... 1.342 1.191 1.000 N/A N/A N/A
End of Period..................................... 1.696 1.342 1.191 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)..................................... 65,130 31,681 9,213 N/A N/A N/A
FIDELITY VIP HIGH INCOME
Unit Value:
Beginning of Period............................... 1.233 1.096 1.000 N/A N/A N/A
End of Period..................................... 1.430 1.233 1.096 N/A N/A N/A
Units Outstanding at End of Period
(in thousands)..................................... 50,470 23,051 6,714 N/A N/A N/A
SELECT INCOME
Unit Value:
Beginning of Period............................... 1.208 1.186 1.028 1.095 1.001 1.000
End of Period..................................... 1.301 1.208 1.186 1.028 1.095 1.001
Units Outstanding at End of Period
(in thousands)..................................... 72,394 58,751 46,845 32,823 18,320 5,372
MONEY MARKET
Unit Value:
Beginning of Period............................... 1.133 1.091 1.045 1.019 1.003 1.000
End of Period..................................... 1.179 1.133 1.091 1.045 1.019 1.003
Units Outstanding at End of Period
(in thousands)..................................... 65,441 60,691 45,589 31,836 19,802 1,447
</TABLE>
No information is shown for Sub-Accounts that commenced operations after
December 31, 1997.
17
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY
Unit Value:
Beginning of Period................................................... 1.356 1.128 0.956 1.000
End of Period......................................................... 1.400 1.356 1.128 0.956
Units Outstanding at End of Period (in thousands)....................... 5,132 3,481 1,900 695
T. ROWE PRICE INTERNATIONAL STOCK
Unit Value:
Beginning of Period................................................... 1.203 1.065 1.000 N/A
End of Period......................................................... 1.223 1.203 1.065 N/A
Units Outstanding at End of Period (in thousands)....................... 1,693 1,170 265 N/A
SELECT AGGRESSIVE GROWTH
Unit Value:
Beginning of Period................................................... 1.526 1.305 1.044 1.000
End of Period......................................................... 1.786 1.526 1.305 1.044
Units Outstanding at End of Period (in thousands)....................... 5,305 4,013 2,393 756
SELECT CAPITAL APPRECIATION
Unit Value:
Beginning of Period................................................... 1.484 1.383 1.000 N/A
End of Period......................................................... 1.672 1.484 1.383 N/A
Units Outstanding at End of Period (in thousands)....................... 1,914 1,366 391 N/A
SELECT GROWTH
Unit Value
Beginning of Period................................................... 1.527 1.269 1.032 1.000
End of Period......................................................... 2.019 1.527 1.269 1.032
Units Outstanding at End of Period (in thousands)....................... 5,168 3,534 2,177 756
FIDELITY VIP GROWTH
Unit Value:
Beginning of Period................................................... 1.397 1.235 1.000 N/A
End of Period......................................................... 1.701 1.397 1.235 N/A
Units Outstanding at End of Period (in thousands)....................... 2,198 1,326 262 N/A
SELECT GROWTH AND INCOME
Unit Value:
Beginning of Period................................................... 1.584 1.324 1.030 1.000
End of Period......................................................... 1.913 1.584 1.324 1.030
Units Outstanding at End of Period (in thousands)....................... 7,897 5,670 3,673 1,724
FIDELITY VIP EQUITY-INCOME
Unit Value:
Beginning of Period................................................... 1.342 1.191 1.000 N/A
End of Period......................................................... 1.696 1.342 1.191 N/A
Units Outstanding at End of Period (in thousands)....................... 3,421 1,802 429 N/A
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
FIDELITY VIP HIGH INCOME
Unit Value:
Beginning of Period................................................... 1.233 1.096 1.000 N/A
End of Period......................................................... 1.430 1.233 1.096 N/A
Units Outstanding at End of Period (in thousands)....................... 2,753 1,298 273 N/A
SELECT INCOME
Unit Value:
Beginning of Period................................................... 1.168 1.146 0.993 1.000
End of Period......................................................... 1.257 1.168 1.146 0.993
Units Outstanding at End of Period (in thousands)....................... 6,061 4,956 4,114 1,916
MONEY MARKET
Unit Value:
Beginning of Period................................................... 1.106 1.065 1.020 1.000
End of Period......................................................... 1.151 1.106 1.065 1.020
Units Outstanding at End of Period (in thousands)....................... 6,157 6,060 4,027 2,085
</TABLE>
No information is shown for Sub-Accounts that commenced operations after
December 31, 1997.
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1999. The Company, however, may
advertise "total return" and "average annual total return" performance
information based on the periods that the Sub-Accounts have been in existence
and the periods that the Underlying Funds have been in existence. Performance
results for all periods shown below are calculated with all charges assumed to
be those applicable to the Sub-Accounts and the Underlying Funds. 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.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
refers to the annualized income generated by an investment in the Sub-Account
over a specified 30-day or one-month period. The yield is calculated by assuming
that the income generated by the investment during that 30-day or one-month
period is generated each period over a 12-month period and is shown as a
percentage of the investment.
19
<PAGE>
Quotations of average annual total return as shown in Tables 1A and 1B 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
1.40%, the annual Contract fee and the Underlying Fund charges. The calculation
is not adjusted to reflect the deduction of the optional Enhanced Death Benefit
Rider charge of 0.25% which, if elected, would reduce performance.
The performance shown in Table 2A is calculated in exactly the same manner as
those in Tables 1A and 1B; however, the period of time is based on the
Underlying Fund's lifetime, which may predate the Sub-Accounts' inception dates.
These performance calculations are based on the assumption that the Sub-Account
corresponding to the applicable Underlying Fund was actually in existence
throughout the stated period and that the contractual charges and expenses
during that period were equal to those currently assessed under the Contract.
For more detailed information about these performance calculations, including
actual formulas, see the Statement of Additional Information.
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 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;
(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.
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.
20
<PAGE>
TABLE 1A
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
<S> <C> <C> <C>
Select Emerging Markets Fund......................... N/A N/A N/A
Select International Equity Fund..................... 3.16 % N/A 9.58 %
T. Rowe Price International Stock Portfolio.......... 1.63 % N/A 7.80 %
Select Aggressive Growth Fund........................ 17.03 % 15.15 % 18.06 %
Select Capital Appreciation Fund..................... 12.66 % N/A 21.19 %
Select Value Opportunity Fund........................ N/A N/A N/A
Select Growth Fund................................... 32.18 % 13.58 % 14.87 %
Select Strategic Growth Fund......................... N/A N/A N/A
Fidelity VIP Growth Portfolio........................ 21.74 % N/A 21.97 %
Select Growth and Income Fund........................ 20.79 % 14.92 % 13.87 %
Fidelity VIP Equity-Income Portfolio................. 26.30 % N/A 21.83 %
Fidelity VIP High Income Portfolio................... 16.01 % N/A 14.31 %
Select Income Fund................................... 7.62 % 5.34 % 5.04 %
Money Market Fund.................................... 3.97 % 3.22 % 3.17 %
</TABLE>
TABLE 1B
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND 12/31/97 5 YEARS SUB-ACCOUNT
<S> <C> <C> <C>
Select Emerging Markets Fund......................... N/A N/A N/A
Select International Equity Fund..................... 3.16 % N/A 9.58 %
T. Rowe Price International Stock Portfolio.......... 1.63 % N/A 7.80 %
Select Aggressive Growth Fund........................ 17.03 % N/A 16.96 %
Select Capital Appreciation Fund..................... 12.66 % N/A 21.13 %
Select Value Opportunity Fund........................ N/A N/A N/A
Select Growth Fund................................... 32.18 % N/A 20.90 %
Select Strategic Growth Fund......................... N/A N/A N/A
Fidelity VIP Growth Portfolio........................ 21.74 % N/A 21.99 %
Select Growth and Income Fund........................ 20.79 % N/A 19.14 %
Fidelity VIP Equity-Income Portfolio................. 26.30 % N/A 21.84 %
Fidelity VIP High Income Portfolio................... 16.01 % N/A 14.32 %
Select Income Fund................................... 7.62 % N/A 6.35 %
Money Market Fund.................................... 3.97 % N/A 3.79 %
</TABLE>
21
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
<TABLE>
<CAPTION>
SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
NAME OF UNDERLYING FUND 12/31/97 5 YEARS FUND*
<S> <C> <C> <C>
Select Emerging Markets Fund......................... N/A N/A N/A
Select International Equity Fund..................... 3.16 % N/A 9.54 %
T. Rowe Price International Stock Portfolio.......... 1.63 % N/A 6.51 %
Select Aggressive Growth Fund........................ 17.03 % 15.15 % 17.85 %
Select Capital Appreciation Fund..................... 12.66 % N/A 21.13 %
Select Value Opportunity Fund........................ 24.81 % N/A 16.89 %
Select Growth Fund................................... 32.18 % 13.58 % 14.70 %
Select Strategic Growth Fund......................... N/A N/A N/A
Fidelity VIP Growth Portfolio........................ 21.74 % 16.30 % 15.51 %
Select Growth and Income Fund........................ 20.79 % 14.92 % 13.70 %
Fidelity VIP Equity-Income Portfolio................. 26.30 % 18.43 % 15.04 %
Fidelity VIP High Income Portfolio................... 16.01 % 12.27 % 11.19 %
Select Income Fund................................... 7.62 % 5.34 % 4.98 %
Money Market Fund.................................... 3.97 % 3.22 % 4.27 %
</TABLE>
* The inception dates for the Underlying Funds are 2/20/98 for Select Emerging
Markets Fund; 5/2/94 for Select International Equity Fund; 3/31/94 for T. Rowe
Price International Stock Portfolio; 8/21/92 for Select Aggressive Growth Fund;
4/28/95 for Select Capital Appreciation Fund; 4/30/93 for Select Value
Opportunity Fund; 8/21/92 for Select Growth Fund; 2/20/98 for Select Strategic
Growth Fund; 10/9/86 for Fidelity VIP Growth Portfolio; 8/21/92 for Select
Growth and Income Fund; 10/9/86 for Fidelity VIP Equity-Income Portfolio;
9/19/85 for Fidelity VIP High Income Portfolio; 8/21/92 for Select Income Fund
and 4/29/85 for Money Market Fund.
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNT,
THE TRUST, FIDELITY VIP, AND T. ROWE PRICE
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, 1997, the
Company had over $9.4 billion in assets and over $26.6 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 an indirectly wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica") organized
under the laws of Massachusetts in 1844, is the fifth oldest life insurance
company in America. As of December 31, 1997, First Allmerica and its
subsidiaries had over $16.3 billion in combined assets and over $43.8 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
22
<PAGE>
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.
ALLMERICA SELECT SEPARATE ACCOUNT. Each Company maintains a separate account
called the Allmerica Select Separate Account (the "Variable Account"). Unless
otherwise specified, any reference to the "Company" in this Prospectus shall
refer exclusively to Allmerica Financial for contracts issued in the District of
Columbia, Puerto Rico, the Virgin Islands and any state except Hawaii and New
York and to First Allmerica for contracts issued in Hawaii and New York.
Obligations under the contracts are obligations of the Company. The Allmerica
Select Separate Account is a separate investment account of the Company with
fourteen Sub-Accounts. The assets used to fund the variable portions of the
Contract are set aside in Sub-Accounts kept separate from the general assets of
the Company. Each Sub-Account is administered and accounted for as part of the
general business of the Company. The income, capital gains or capital losses of
each Sub-Account, however, are allocated to each Sub-Account, without regard to
any other income, capital gains, or capital losses of the Company. 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.
The Variable Account of Allmerica Financial was authorized by vote of the Board
of Directors of the Company on March 5, 1992 and the Variable Account of First
Allmerica was authorized by vote of the Board of Directors of the Company on
August 20, 1991. The Variable Accounts meet the definition of "separate account"
under federal securities laws and are registered with the SEC as unit investment
trusts under the Investment Company Act of 1940 ("the 1940 Act"). This
registration does not involve the supervision of management or investment
practices or policies of the Variable Accounts by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Separate Account and the Sub-Accounts.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the SEC
under the 1940 Act.
The Trust was established as a Massachusetts business trust on October 11, 1984,
for the purpose of providing a vehicle for the investment of assets of various
separate accounts established by the Company or other affiliated insurance
companies. Ten investment portfolios of the Trust currently are available under
the Contract, each issuing a series of shares: Select Emerging Markets Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Value Opportunity Fund, Select Growth Fund, Select
Strategic Growth Fund, Select Growth and Income Fund, Select Income Fund and the
Money Market Fund. The assets of each Fund are held separate from the assets of
the other Funds. Each Fund operates as a separate investment vehicle and the
income or losses of one Fund have no effect on the investment performance of
another Fund. Shares of the Trust are not offered to the general public but
solely to such variable accounts.
Allmerica Financial Investment Management Services, Inc. ("Manager") 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."
23
<PAGE>
VARIABLE INSURANCE PRODUCTS FUND. Variable Insurance Products Fund ("Fidelity
VIP"), managed by Fidelity Management & Research, Inc., is an open-end,
diversified management investment company organized as a Massachusetts business
trust on November 13, 1981 and registered with the SEC under the 1940 Act. Three
of its investment portfolios are available under the Contract: Fidelity VIP High
Income Portfolio, Fidelity VIP Equity-Income Portfolio, and Fidelity VIP Growth
Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. Fidelity Management & Research, Inc. ("FMR") is one of America's
largest investment management organizations, and has its principal business
address at 82 Devonshire Street, Boston, Massachusetts. It is composed of a
number of different companies which provide a variety of financial services and
products. FMR is the original Fidelity company, founded in 1946. It provides a
number of mutual funds and other clients with investment research and portfolio
management services. The Portfolios of Fidelity VIP as part of their operating
expenses pay an investment management fee to FMR. See "Investment Advisory
Services to Fidelity VIP."
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Contract:
the T. Rowe Price International Stock Portfolio. See "Investment Advisory
Services to T. Rowe Price." One of its affiliates, T. Rowe Price Associates,
Inc., serves as the Sub-Adviser to the Select Capital Appreciation Fund.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Funds is set forth below. MORE
DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES, RESTRICTIONS AND
RISKS, EXPENSES PAID BY THE FUNDS, AND OTHER RELEVANT INFORMATION REGARDING THE
FUNDS MAY BE FOUND IN THE PROSPECTUSES OF THE TRUST, FIDELITY VIP AND T. ROWE
PRICE, WHICH ACCOMPANY THIS PROSPECTUS, AND SHOULD BE READ CAREFULLY BEFORE
INVESTING. Also, the Statements of Additional Information of the Funds are
available upon request. There can be no assurance that the investment objectives
of the 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.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Capital Management International Inc.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income). The Fund will invest primarily in common
stocks of established non-U.S. companies. The Sub-Adviser for the Select
International Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The manager of the Portfolio is Rowe Price-Fleming International,
Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management, L.P.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration, and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund will invest
primarily in common stock of industries and companies which are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate. The Sub-Adviser for
the Select Capital Appreciation Fund is T. Rowe Price Associates, Inc.
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<PAGE>
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
principally in diversified portfolio of common stocks of small and mid-size
companies whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued. The Sub-Adviser for the Select Value Opportunity
Fund is Cramer Rosenthal McGlynn, LLC.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential. The Sub-Adviser for the Select Growth
Fund is Putnam Investment Management, Inc.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is John A. Levin & Co., Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the
Fidelity VIP prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The Fund will invest
primarily in investment-grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund.
If there is a material change in the investment policy of a Fund, 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.
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INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST. The overall responsibility for the
supervision of the affairs of the Trust vests in the trustees. The Trust has
entered into an agreement ("Management Agreement") with Allmerica Financial
Investment Management Services, Inc. ("Manager"), an indirectly wholly owned
subsidiary of First Allmerica, to handle the day-to-day affairs of the Trust.
The Manager, subject to review by the trustees, is responsible for the general
management of the Funds of the Trust. The Manager 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 the Manager.
Other than the expenses specifically assumed by the Manager under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("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 the Manager, expenses for proxies, prospectuses, reports to shareholders
and other expenses.
For providing its services under the Management Agreement, the Manager 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>
<CAPTION>
FUND NET ASSET VALUE RATE
- --------------------------------------- ---------------------------------------------- ---------
<S> <C> <C>
Select Emerging Markets Fund * 1.35%
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Select Emerging Markets Fund and Select Strategic Growth Fund, the
rate applicable to the Manager does not vary according to the level of assets in
the Fund.
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<PAGE>
Under the Management Agreement with the Trust, the Manager has entered into
agreements with investment advisers ("Sub-Advisers") selected by the Manager and
Trustees in consultation with BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a
pension consulting firm. The cost of such consultation services is borne by the
Manager. BARRA RogersCasey provides consulting services to pension plans
representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey is wholly-controlled by BARRA, Inc. As a consultant,
BARRA RogersCasey has no discretionary or decision-making authority with respect
to the Funds, and has no responsibility for any investment advice or other
services provided to the Funds by the Manager or the Sub-Advisers.
Each independent Sub-Adviser is selected by using strict objective,
quantitative, and qualitative criteria, with special emphasis on the
Sub-Adviser's record in managing similar portfolios. In consultation with BARRA
RogersCasey, a committee monitors and evaluates the ongoing performance of all
of the Funds. The committee may recommend the replacement of a Sub-Adviser of
one of the Funds of the Trust, or the addition or deletion of any other Funds.
The committee includes members who may be affiliated or unaffiliated with the
Company and the Trust. The Sub-Advisers (other than Allmerica Asset Management,
Inc.) are not affiliated with the Company or the Trust.
Under each Sub-Adviser agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The terms of a Sub-Adviser agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the Fund.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds, and
should be read in conjunction with the Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP. For managing investments and
business affairs, each Portfolio pays a monthly fee to Fidelity Management &
Research, Inc. ("FMR"). The prospectus of Fidelity VIP contains additional
information about the Portfolios, including information about additional
expenses paid by the Portfolios, and should be read in conjunction with this
Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by Fidelity Management. On an annual basis this rate cannot
rise above 0.37%, and will drop as the total assets in these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
Both Fidelity VIP Growth and Fidelity VIP Equity-Income Portfolios' fee rates
are made up of two components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by Fidelity Management. On an annual basis, this rate
cannot rise above 0.52%, and will drop as the total assets in these funds
rise.
2. An individual Portfolio fee rate of 0.30% for the Fidelity VIP Growth
Portfolio and 0.20% for the Fidelity VIP Equity-Income Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
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<PAGE>
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Growth Portfolio may have a fee of as
high as 0.82% of its average net assets. The Fidelity VIP Equity-Income
Portfolio may have a fee as high as 0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. To cover investment management
and operating expenses, the T. Rowe Price International Stock Portfolio pays
Rowe Price-Fleming International, Inc. a single, all-inclusive fee of 1.05% of
its average daily net assets.
DESCRIPTION OF THE CONTRACT
Unless otherwise specified, any reference to the "Company" in this Prospectus
shall refer exclusively to Allmerica Financial Life Insurance and Annuity
Company for contracts issued in the District of Columbia, Puerto Rico, the
Virgin Islands and any state except Hawaii and New York and exclusively to First
Allmerica Financial Life Insurance Company for contracts issued in Hawaii and
New York.
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application and/or signature for
certain classes of Contracts. Payments are to be made payable to the Company. A
net payment is equal to the payment received less the amount of any applicable
premium tax.
The initial net payment will be credited to the Contract and allocated among the
requested accounts as of the date that all issue requirements are properly met.
If all issue requirements are not complied with within five business days of the
Company's receipt of the initial payment, the payment will be returned unless
the Owner specifically consents to the holding of the initial payment until
completion of any outstanding issue requirements. Subsequent payments will be
credited as of the Valuation Date received at the Principal Office on the basis
of accumulation unit value next determined after receipt.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$25,000. Each subsequent payment must be at least $100. The minimum allocation
to a Guarantee Period Account is $1,000. If the Owner requests an allocation of
less than $1,000 to a Guarantee Period Account, the Company reserves the right
to apply that amount to the Money Market Fund of the Trust.
From time to time, where permitted by law, the Company may credit amounts to
Contracts when Contracts are sold to individuals or groups of individuals in a
manner that reduces sales expenses. The Company will consider factors such as
the following: (1) the size and type of group or class, and the persistency
expected from that group or class; (2) the total amount of payments to be
received, and the manner in which payments are remitted; (3) the purpose for
which the Contracts are being purchased, and whether that purpose makes it
likely that costs and expenses will be reduced; (4) other transactions where
sales expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker-dealers or certain financial institutions with respect to
Contracts within the same group or class (for example, broker-dealers who offer
this Contract in connection with financial planning services offered on a fee
for service basis). The Company may also credit amounts to Contracts, where
either the Owner or the Annuitant on the issue date is within the following
class of individuals ("eligible persons"): 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
Underlying Funds, investment managers or sub-advisers; 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.
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<PAGE>
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. As
of the date of this Prospectus, payments to the Contract may be allocated among
all of the current Sub-Accounts during the life of the Contract and prior to the
Annuity Date. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts among which
payments may be allocated. The Owner may change allocation instructions for new
payments pursuant to a written or telephone request. If telephone requests are
elected by the Owner, a properly completed authorization must be on file before
telephone requests will be honored. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number. All transfer instructions by
telephone are tape-recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office of the Company 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.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the Funds
for taxes, charges or fees. At the time the Contract is issued, the "Right to
Examine" provision on the cover of the Contract will specifically indicate
whether the refund will be equal to gross payments or equal to the greater of
(a) or (b) as set forth above.
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.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS.
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund.
Generally, the Company will pay to the Owner an amount equal to the sum of (1)
the difference between the amount paid, including fees, and any amount allocated
to the Variable Account, and (2) the Accumulated Value of amounts allocated to
the Variable Account as of the date the request is received. If the Contract was
purchased as an IRA or purchased in a state that requires a full refund, the IRA
revocation right described above may be utilized in lieu of the special
surrender right. At the time the 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.
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.
29
<PAGE>
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 makes no 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. As of the date of this Prospectus, transfers may be made
to all of the current Sub-Accounts during the life of the Contract and prior to
the Annuity Date. However, should additional Funds be added to the Contract, the
Company reserves the right to limit the number of Sub-Accounts to which
transfers may be made.
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, if the execution of such transactions may disadvantage or potentially
impair the Contract rights of other Contract owners. The Company may, among
other things, not accept (1) the transfer or exchange instructions of any agent
acting under a power of attorney on behalf of more than one Contract owner, or
(2) the transfer or exchange instructions of individual Contract 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 Contract owner at
the same time.
ASSET ALLOCATION MODEL REALLOCATIONS. If an Owner elects to follow an asset
allocation strategy, the Owner may preauthorize transfers in accordance with the
chosen strategy. The Company may provide administrative or other support
services to independent third parties who provide recommendations as to such
allocation strategies. However, the Company does not engage any third parties to
offer investment allocation services of any type under this Contract, does not
endorse or review any investment allocation recommendations made by such third
parties and is not responsible for the investment allocations and transfers
transacted on the Owner's behalf. The Company does not charge for providing
additional asset allocation support services. Additional information concerning
asset allocation programs for which the Company is currently providing support
services may be obtained from a registered representative or the Company.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Money Market Fund, the Select Income Fund or
the Fixed Account (the source account) to one or more Funds. Automatic transfers
may not be made into the Fixed Account, the Guarantee Period Accounts or, if
applicable, the Fund being used as the source account. 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 Funds. Automatic
transfers will continue until 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 the source account after its
balance has fallen to zero, this option will not restart automatically and the
Owner must provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments deposited into the Fixed Account and utilizing the Fixed
Account as the source account from which to process automatic transfers. For
more information see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the 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
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<PAGE>
Rebalancing will continue until the Owner's request to terminate or change the
option is received by the Company. As such, subsequent payments allocated in a
manner different from the percentage allocation mix in effect on the date the
payment is received will be reallocated in accordance with the existing mix on
the next scheduled date unless the Owner's timely request to change the mix or
terminate the option is received by the Company.
The Company reserves the right to limit the number of funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings of that request in the same Contract year
count as one transfer towards the 12 transfers which are guaranteed to be free
of a transfer charge in each Contract year. There currently is no charge for
either program. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
E. SURRENDER.
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive an amount equal to the Surrender Value less any applicable tax
withholding. The Owner must return the Contract and a signed, written request
for surrender, satisfactory to the Company, to the Principal Office. The amount
payable to the Owner upon surrender will be based on the Contract's Accumulated
Value as of the Valuation Date on which the request and the Contract are
received at the Principal Office. The Contract fee will be deducted upon
surrender of the Contract.
After the Annuity Date, only Contracts under which a commutable period certain
annuity option was elected may be surrendered. The Surrender Amount is the
commuted value of any unpaid annuity benefit payments, computed on the basis of
the assumed interest rate incorporated in such annuity benefit payments.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
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 surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program (Texas ORP) are
restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the Accumulated Value under the Contract to other
Contracts issued by the Company and owned by the trustee. Any such reallocation
will be at the unit values for the Sub-Accounts as of the Valuation Date on
which a written, signed request is received at the Principal Office.
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
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<PAGE>
F. WITHDRAWALS.
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment against the remaining value, as described under "GUARANTEE
PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
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 monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100. The Owner may elect, by
written request, 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 Owner
may elect to withdraw 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 date the written request is received at the Principal Office or, if later,
on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals by written request to the Principal Office only.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date the Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years. While an
LED is in effect, the Owner must remain the Annuitant.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one) and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to
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determine the amount to be distributed during the year. The Owner may elect
monthly, bi-monthly, quarterly, semi-annual, or annual distributions, and may
terminate the LED option at any time. Under contracts issued in Hawaii and New
York, the LED option will terminate automatically on the maximum Annuity Date
permitted under the Contract at which time an Annuity Option must be elected.
The Owner also may elect to receive distributions under an LED option which is
determined on the joint life expectancy of the Owner and a beneficiary. The
Company also may offer other systematic withdrawal options.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service (IRS) as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS," "B. Taxation of the Contracts in General."
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT.
In the event that an Owner or (in the event the Owner is a non-natural person)
an Annuitant dies prior to the Annuity Date, the Company will pay the
beneficiary a death benefit, except where the Contract is continued as provided
in "H. The Spouse of the Owner as Beneficiary."
DEATH OF AN OWNER PRIOR TO THE ANNUITY DATE. Upon the death of an Owner (or of
an Annuitant if the Owner is a non-natural person), a death benefit will be
paid. The standard death benefit will be equal to the GREATER of (a) the
Accumulated Value under the Contract increased by any positive Market Value
Adjustment; or (b) gross payments, decreased proportionately to reflect
withdrawals (for each withdrawal, the proportionate reduction is calculated as
the death benefit under this option immediately prior to the withdrawal
multiplied by the withdrawal amount and divided by the Accumulated Value
immediately prior to the withdrawal).
ENHANCED DEATH BENEFIT RIDER. At the time of application for the Contract, the
Owner may elect an optional Enhanced Death Benefit Rider. Under the Enhanced
Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a non-natural person) dies prior
to the Annuity Date and before the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment (the
"Accumulated Value"); or
(b) gross payments compounded daily at an annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (5% compounding not available in Hawaii and New York); or
(c) the highest Accumulated Value of all Contract anniversaries, as determined
after the Accumulated Value of each contract anniversary is increased for
subsequent payments and decreased proportionately for subsequent
withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below
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which the death benefit will not drop and is locked-in until the next Contract
anniversary. The values of (b) and (c) will be decreased proportionately if
withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a non-natural person) dies
prior to the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
See APPENDIX C, "THE DEATH BENEFIT" for specific examples of death benefit
calculations.
A separate charge is made for an optional Enhanced Death Benefit Rider. On the
last day of each month and on the date the Rider is terminated, a charge equal
to 1/12th of an annual rate of 0.25% is made against the Accumulated Value of
the Contract at that time. The charge is deducted in arrears through a pro-rata
reduction (based on relative values) of Accumulation Units in the Sub-Accounts,
of dollar amounts in the Fixed Account, and of dollar amounts in the Guarantee
Period Accounts.
PAYMENT OF THE DEATH BENEFIT. The death benefit generally will be paid to the
beneficiary in one sum within seven business days of the receipt of due proof of
death at the Principal Office unless the Owner has specified a death benefit
annuity option. 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 a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning 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 Sub-Account investing
in the Money Market Fund. The excess, if any, of the death benefit over the
Accumulated Value also will be transferred to the Sub-Account investing in the
Money Market Fund. 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.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. 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 Sub-Account investing in the Money Market Fund; (2) the excess, if any, of
the death benefit over the Contract's Accumulated Value also will be added to
the Sub-Account investing in the Money Market Fund. Additional payments may be
made. All other rights and benefits provided in the Contract will continue,
except that any subsequent spouse of such new Owner will not be entitled to
continue the Contract upon such new Owner's death.
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I. 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.
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
The Annuity Date is selected by the Owner. To the extent permitted by state law,
the Annuity Date may be the first day of any month (1) before the Owner's 85th
birthday, if the Owner's age on the issue date of the Contract is 75 or under;
or (2) within ten years from the issue date of the Contract and before the
Owner's 90th birthday, if the Owner's age on the issue date is between 76 and
90. The Owner may elect to change the Annuity Date by sending a request to the
Principal Office at least one month before the Annuity Date. To the extent
permitted by state law, the new Annuity Date must be the first day of any month
occurring before the Owner's 99th birthday. If there are Joint Owners, the age
of the younger will determine the Annuity Date. The Internal Revenue Code ("the
Code") and the terms of qualified plans impose limitations on the age at which
annuity benefit payments may commence and the type of annuity option selected.
See "FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the account(s)
selected.
To the extent a fixed annuity benefit payment option is selected, Accumulated
Value will be transferred to the Fixed Account of the Company, and the annuity
benefit payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout, a payment to the Owner, or the payee the Owner
designates, equal to the value of the fixed number of Annuity Units in the
Sub-Account(s) is made monthly, quarterly, semi-annually or annually. Since the
value of an Annuity Unit in a Sub-Account will reflect the investment
performance of the Sub-Account, the amount of each annuity benefit payment will
vary.
The annuity option selected must produce an initial payment of at least $50 (a
lower amount may be required in some states). The Company reserves the right to
increase this minimum amount. If the annuity option(s) selected do(es) not
produce an initial payment which meet this minimum, a single payment may be
made. Once the Company begins making annuity benefit payments, the Owner cannot
make withdrawals or surrender the annuity benefit, except where the Owner has
elected a commutable period certain option. Beneficiaries entitled to receive
remaining payments under either a commutable or non-commutable "period certain"
option may elect instead to receive a lump sum settlement. See "K. Description
of Variable Annuity Payout Options."
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
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If the owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity option after annuitization, the Company may permit such owner
to exchange the fixed contract for a Contract offered in this Prospectus. The
proceeds of the fixed contract will be applied towards the variable annuity
option desired by the owner. The number of Annuity Units under the option will
be calculated using the Annuity Unit values as of the 15th of the month
preceding the Annuity Date.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Select Growth and Income Fund, the Select Income
Fund, the Select Growth Fund and the Money Market Fund.
The Company currently also provides these same options funded through the Fixed
Account (fixed-amount annuity payout option). Regardless of how payments were
allocated during the accumulation period, any of the variable annuity options or
the fixed-amount options may be selected, or any of the variable annuity options
may be selected in combination with any of the fixed-amount annuity options.
Other annuity options may be offered by the Company. IRS regulations may not
permit certain of the available annuity options when used in connection with
certain qualified Contracts.
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
and any remaining annuity benefit payments will continue to the beneficiary in
accordance with the terms of the annuity benefit payment option selected prior
to the Annuity Date. If there are Joint Owners on or after the Annuity Date,
upon the first Owner 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 prior to the Annuity Date.
If the Owner selects an annuity payout option which provides for the
continuation of payments after the death of an Annuitant, upon the death of an
Annuitant on or after the Annuity Date, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the Annuitant with the
guarantee that if the Annuitant should die before the guaranteed number of
payments have been made, the remaining guaranteed payments will continue to be
paid.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING LIFETIME OF THE ANNUITANT
ONLY. This variable annuity is payable during the Annuitant's life. It would be
possible under this option for the Owner to receive only one annuity benefit
payment if the Annuitant dies prior to the due date of the second annuity
benefit payment, two annuity benefit payments if the Annuitant dies before the
due date of the third annuity benefit payment, and so on. Payments will
continue, however, during the lifetime of the Annuitant, no matter how long he
or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the Annuitant with the guarantee that if the Annuitant
dies and (1) exceeds (2), then periodic variable annuity benefit payments will
continue until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the Annuitant.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
during the joint lifetime of the Annuitant and another individual (i.e. the
beneficiary or a Joint Annuitant), and then continues thereafter during the
lifetime of the survivor. The amount of each payment during the lifetime of the
survivor is based on the same number of Annuity Units which applied during their
joint lifetime. There is no minimum number of payments under this option.
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JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable during the joint lifetime of the Annuitant and one other individual
(i.e. the beneficiary or a Joint Annuitant), and then continues thereafter
during the lifetime of the survivor. The amount of each periodic payment during
the lifetime of the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during their joint lifetime. There is no minimum
number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to thirty and may be
commutable or non-commutable. If the Annuitant dies before the end of the
period, remaining payments will continue to to be paid. A commutable option
provides the Owner with the right to request a lump sum payment of any remaining
balance after annuity payments have commenced. Under a non-commutable period
certain option, the Owner may not request a lump sum payment. See "Annuity
Benefit Payments" in the SAI.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under a period
certain option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice.
L. 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 under a Sub-Account on any
Valuation Date thereafter is equal to the value of such unit on the immediately
preceding Valuation Date, multiplied by the product of (1) the net investment
factor of the Sub-Account for the current Valuation Period and (2) a factor to
adjust benefits to neutralize the assumed interest rate. The assumed interest
rate, discussed below, is incorporated in the variable annuity options offered
in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years (six or more years under New York Contracts), the Annuity
value is the Accumulated Value less any premium taxes and adjusted for any
Market Value Adjustment. For commutable period certain options or any period
certain option less than ten years (less than six years under New York
Contracts), the value is the Surrender Value less any premium tax. For a death
benefit annuity, the annuity value will be the amount of the death benefit. The
annuity rates in the Contract are based on a modification of the Annuity 2000
Mortality Table.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and/or beneficiary, if applicable, and the value of the amount applied under the
annuity option. The variable annuity options offered by the Company are based on
a 3.5% assumed interest rate. Variable payments are affected by the assumed
interest rate used in calculating the annuity option rates. Variable annuity
benefit payments will increase over periods when the actual net investment
result of the Sub-Account(s) funding the annuity exceeds the equivalent of the
assumed interest rate for the period. Variable annuity benefit payments will
decrease over periods when the actual net investment result of the respective
Sub-Account is less than the equivalent of the assumed interest rate for the
period.
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The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten or more years
(six or more years under New York Contracts) 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) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For
commutable period certain options and any period certain option of less than ten
years (less than six years under New York Contracts), the Surrender Value less
premium taxes, if any, is used rather than the Accumulated Value. The dollar
amount of the first variable annuity benefit payment is then divided by the
value of an Annuity Unit of the selected Sub-Account(s) to determine the number
of Annuity Units represented by the first payment. This number of Annuity Units
remains fixed under all annuity options except the joint and two-thirds survivor
annuity option. For each subsequent payment, the dollar amount of the variable
annuity benefit payment is determined by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Account(s). The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer its Owners both fixed and variable
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 an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "Annuity Benefit Payments" in the SAI.
M. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex Non-Guaranteed Current Annuity Option Rates or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
N. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the account(s) selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the Principal Office. The
number of Accumulation Units resulting from each payment will remain fixed
unless changed by a subsequent split of Accumulation Unit value, a transfer, a
withdrawal, or surrender. The dollar value of an Accumulation Unit of each
Sub-Account varies from Valuation Date to Valuation Date based on the investment
experience of that Sub-Account, and will reflect the investment performance,
expenses and charges of its Underlying Funds. The value of an Accumulation Unit
at inception was set at $1.00 on the first Valuation Date for each Sub-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 APPENDIX B, "THE MARKET VALUE ADJUSTMENT."
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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 the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (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 1.25% 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.
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 Trust,
Fidelity VIP, and T. Rowe Price.
A. VARIABLE ACCOUNT DEDUCTIONS.
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
phase and the annuity 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 option selected), no matter how
long the Annuitant (or other individual) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity phase on all Contracts, including those that do not involve a life
contingency, even though the Company does not bear direct mortality risk with
respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the 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.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
intends to recoup commissions and other sales expenses through profits from the
Company's General Account, which may include amounts derived from mortality and
expense risk charges.
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ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily 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 phase. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. 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 (see "B. Contract Fee" below) 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
prospectuses and SAIs of the Trust, Fidelity VIP, and T. Rowe Price contain
additional information concerning expenses of the Underlying Funds.
B. CONTRACT FEE.
A $35 Contract fee ($30 for contracts issued in Hawaii, New York, North Dakota
and Pennsylvania) currently is deducted on the Contract anniversary 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 percentage of the charge deducted from that 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; 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 ENHANCED DEATH BENEFIT RIDER CHARGE.
Subject to state availability, the Company offers an optional Enhanced Death
Benefit Rider that may be elected by the Owner. A separate monthly charge is
made for the rider. On the last day of each month and on the date the rider is
terminated, a charge equal to 1/12th of an annual rate of 0.25% is made against
the Accumulated Value of the Contract at that time. The charge is deducted in
arrears through a pro-rata reduction (based on relative values in Accumulation
Units of the Sub-Accounts, of dollar amounts in the Fixed Account, and of dollar
amounts in the Guarantee Period Accounts).
For a description of this rider, see "G. Death Benefit" under "DESCRIPTION OF
THE CONTRACT," above.
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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.
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 makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "D. Transfer Privilege."
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. 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%.
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
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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 Fund. 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 unless
(1) less than $1,000 would remain in the Guarantee Period Account on its
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Sub-Account investing in the Money Market Fund.
Where amounts have been renewed automatically in a new Guarantee Period, it is
the Company's current practice to give the Owner an additional 30 days to
transfer out of the Guarantee Period Account without application of a Market
Value Adjustment. This practice may be discontinued or changed at the Company's
discretion. Under contracts issued in New York, the Company will transfer monies
out of the Guarantee Period Account without application of a Market Value
Adjustment if the Owner's request is received within ten days of the renewal
date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit. However, a positive Market Value
Adjustment, if any, will increase the value of the death benefit when based on
the Contract's Accumulated Value. See "G. 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 account
value. Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account by
the market value factor. The market value factor for each Guarantee Period
Account is equal to:
[(1+i)/(1+j)] to the power of 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
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value is also affected by the minimum guaranteed rate of 3% such that 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 B, "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 "F. Withdrawals" and "E. Surrender." 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.
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 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.
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
were a separate taxable entity.
THE VARIABLE ACCOUNT IS CONSIDERED A PART OF AND TAXED WITH THE OPERATIONS OF
THE COMPANY. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
Under Section 817(h) of the Code a variable annuity contract will not be treated
as an annuity contract for any period during which the investments made by the
Separate Account or Underlying Fund are not adequately diversified in accordance
with regulations prescribed by the Treasury Department. If a Contract is not
treated as an annuity contract, the income on a contract, for any taxable year
of an owner, would be treated as ordinary income received or accrued by the
owner. The IRS has issued regulations relating to the diversification
requirements for variable annuity and variable life insurance contracts under
Section 817(h) of the Code. The regulations provide that the investments of a
segregated asset account underlying a variable annuity contract are adequately
diversified if no more than 55% of the value of its assets is represented by any
one investment, no more than 70% by any two investments, no more than 80% by any
three investments, and no more than
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90% by any four investments. It is anticipated that the Funds of the Allmerica
Investment Trust, the Portfolios of Fidelity VIP and the Portfolio of T. Rowe
Price 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.
In addition, 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 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 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.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 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 D below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contracts described in this Prospectus will, with
certain exceptions (see "Non-Natural Owner" below), be considered annuity
contracts 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 Owner will be taxed on the annual increase in the 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. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. 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.
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ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced 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 to the Owner, whether
or not the Owner is receiving the payments. If an Owner 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 an 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). Furthermore, under
Section 72 of the Code, this penalty tax will not be imposed, irrespective of
age, if the amount received is one of a series of "substantially equal" periodic
payments made at least annually for the life or life expectancy of the Owner.
This requirement 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 that the amount be paid out as one of a series of
"substantially equal" periodic payments is met when the number of units
withdrawn to make each distribution is substantially the same. 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 Owner's
age 59 1/2 or five years, will subject the Owner to the 10% penalty tax on the
prior distributions. In addition to the exceptions above, the penalty tax will
not apply to withdrawals from a qualified Contract made to an employee who has
terminated employment after reaching age 55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
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.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural 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.
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
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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. In addition, plan assets are treated as property of the employer, and are
subject to the claims of the employer's general creditors.
C. 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.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified retirement plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
Qualified Contracts may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to owners of non-qualified
Contracts. Individuals purchasing a qualified Contract should carefully review
any such changes or limitations which may include restrictions to ownership,
transferability, assignability, contributions, and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 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 Section 408(b) 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 revoke the Contract as described
in this Prospectus. See "B. Right to Revoke Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans 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.
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TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity Contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company also will furnish an annual
report to the Owner containing a statement of his or her account, including
Accumulation Unit values and other information as required by applicable law,
rules and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro-rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will instead be allocated to the Money Market Fund.
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
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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 Portfolios 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, the Trust, Fidelity VIP
and T. Rowe Price 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 are 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, to
(1) transfer assets from the Variable Account or any of its Sub-Accounts to
another of the Company's separate accounts or sub-accounts having assets of the
same class, (2) to operate the Variable Account or any Sub-Account as a
management investment company under the 1940 Act or in any other form permitted
by law, (3) to deregister the Variable Account under the 1940 Act in accordance
with the requirements of the 1940 Act, (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the
Sub-Accounts. In no event will the changes described above be made without
notice to Owners in accordance with the 1940 Act.
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. The Company also reserves the right 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, including but not
limited to requirements for annuity contracts and retirement plans under the
Code. Any such changes will apply uniformly to all Contracts that are affected.
You 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.
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Shares for which no timely instructions are received will be voted in proportion
to the instructions which 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 Contract offered by this Prospectus may be purchased from certain
independent broker-dealers which are registered under the Securities and
Exchange Act of 1934 Act and members of the National Association of Securities
Dealers, Inc. ("NASD"). The Contract also is offered through Allmerica
Investments, Inc., which is the principal underwriter and distributor of the
Contracts. Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653,
is a registered broker-dealer, a member of the NASD and an indirectly wholly
owned subsidiary of First Allmerica.
The Company pays commissions not to exceed 1.0% of payments to broker-dealers
which sell the Contract, plus ongoing annual compensation of up to 1.0% of
Contract value. To the extent permitted by NASD rules, promotional incentives or
payments also 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.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-366-1492.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Owners. Currently, the Company receives service fees with respect to the
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares of such Underlying Funds held by
the Variable Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Variable Account.
The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account, its
principal underwriter or the Company is a party.
49
<PAGE>
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
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
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 has initiated formal communications with all of its significant
suppliers and large customers 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 impact of a
third party's Year 2000 issue, 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
project, there can be no assurance that exposure for material contingencies will
not arise.
The Company will utilize both internal and external resources to reprogram or
replace, and test both information technology and embedded technology systems
for Year 2000 modifications. The Company plans to complete the mission critical
elements of the Year 2000 by December 31, 1998. The cost of the Year 2000
project will be expensed as incurred over the next two years and is being funded
primarily through a reallocation of resources from discretionary projects.
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. Through September 30, 1998, the Company and its
subsidiaries and affiliates have incurred and expensed approximately $47 million
related to the assessment of, and preliminary efforts in connection with, the
project and the development of a remediation plan. The total remaining cost of
the project is estimated at between $30-40 million.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
50
<PAGE>
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.
51
<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.
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
Fund.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (Dollar Cost Averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the Sub-Account(s)
transferred into. If the automatic transfer option is terminated prior to the
end of the six month period, the enhanced rate will no longer apply. The Company
reserves the right to extend the period of time that the enhanced rate will
apply.
A-1
<PAGE>
APPENDIX B
THE MARKET VALUE ADJUSTMENT
MARKET VALUE ADJUSTMENT -- The following are examples of how the Market Value
Adjustment works:
The market value factor is: [(1+i)/(1+j)] to the power of n/365 - 1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (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.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
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 = the market value factor multiplied by the withdrawal
adjustment
= -.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>
<C> <C> <S>
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
= (1.0093) to the power of 7 - 1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694 X $62,985.60
= $4,216.26
</TABLE>
B-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>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.11)] - 1
= (.97297) to the power of 7 - 1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the negative of the excess interest earned over
3%
= Minimum of (-.17454 X $62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] to the power of n/365 - 1
= [(1+.08)/(1+.06)] to the power of 2555/365 - 1
= (1.01887) to the power of 7 - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
B-2
<PAGE>
APPENDIX C
THE DEATH BENEFIT
The Hypothetical Accumulated Values assumed below are for purposes of example
only, in order to demonstrate how the death benefit is calculated. They are not
intended to represent past or future investment rates of return.
PART 1: DEATH OF THE OWNER -- WITHOUT ENHANCED DEATH BENEFIT RIDER
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are no withdrawals. The table below presents
examples of the death benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT VALUE (a) VALUE (b) DEATH BENEFIT
- ------------- -------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1 $ 106,000.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00
2 107,060.00 1,000.00 108,060.00 100,000.00 108,060.00
3 117,766.00 0.00 117,766.00 100,000.00 117,766.00
4 105,989.40 1,000.00 106,989.40 100,000.00 106,989.40
5 116,588.34 0.00 116,588.34 100,000.00 116,588.34
6 128,247.18 1,000.00 129,247.18 100,000.00 129,247.18
7 141,071.90 0.00 141,071.90 100,000.00 141,071.90
8 155,179.08 1,000.00 156,179.08 100,000.00 156,179.08
9 170,696.98 0.00 170,696.98 100,000.00 170,696.98
10 187,766.68 0.00 187,766.68 100,000.00 187,766.68
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments reduced proportionately to reflect withdrawals.
The Hypothetical Death Benefit is equal to the greater of Values (a) and (b).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are withdrawals. The table below presents
examples of the death benefit based on the Hypothetical Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT VALUE (a) VALUE (b) DEATH BENEFIT
- ------------- -------------- -------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 106,000.00 $ 0.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00
2 107,060.00 0.00 1,000.00 108,060.00 100,000.00 108,060.00
3 7,766.00 100,000.00 0.00 7,766.00 7,206.35 7,766.00
4 6,989.40 0.00 1,000.00 7,989.40 7,206.35 7,989.40
5 7,688.34 0.00 0.00 7,688.34 7,206.35 7,688.34
6 8,457.18 0.00 1,000.00 9,457.18 7,206.35 9,457.18
7 9,302.90 0.00 0.00 9,302.90 7,206.35 9,302.90
8 10,233.18 0.00 1,000.00 11,233.18 7,206.35 11,233.18
9 11,256.50 0.00 0.00 11,256.50 7,206.35 11,256.50
10 1,382.14 10,000.00 0.00 1,382.14 875.07 1,382.14
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments reduced proportionately to reflect withdrawals.
The Hypothetical Death Benefit is equal to the greater of Values (a) and (b).
C-1
<PAGE>
PART 2: DEATH OF THE OWNER -- WITH ENHANCED DEATH BENEFIT RIDER (FOR CONTRACTS
OTHER THAN THOSE ISSUED IN HAWAII AND NEW YORK)
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are no withdrawals. The table below presents
examples of the death benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT VALUE (a) VALUE (b) VALUE (c) DEATH BENEFIT
--- -------------- ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 106,000.00 $ 0.00 $ 106,000.00 $ 105,000.00 $ 106,000.00 $ 106,000.00
2 107,060.00 1,000.00 108,060.00 110,250.00 108,060.00 110,250.00
3 117,766.00 0.00 117,766.00 115,762.50 117,766.00 117,766.00
4 105,989.40 1,000.00 106,989.40 121,550.63 117,766.00 121,550.63
5 116,588.34 0.00 116,588.34 127,628.16 117,766.00 127,628.16
6 128,247.18 1,000.00 129,247.18 134,009.56 129,247.18 134,009.56
7 141,071.90 0.00 141,071.90 140,710.04 141,071.90 141,071.90
8 155,179.08 1,000.00 156,179.08 147,745.54 156,179.08 156,179.08
9 170,696.98 0.00 170,696.98 155,132.82 170,696.98 170,696.98
10 187,766.68 0.00 187,766.68 162,889.46 187,766.68 187,766.68
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments compounded daily at an annual rate of 5%,
decreased proportionately to reflect prior withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the death benefit based on the hypothetical
Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE WITHDRAWAL ADJUSTMENT VALUE (a) VALUE (b) VALUE (c) DEATH BENEFIT
--- -------------- -------------- ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 106,000.00 $ 0.00 $ 0.00 $ 106,000.00 $ 105,000.00 $ 106,000.00 $ 106,000.00
2 107,060.00 0.00 1,000.00 108,060.00 110,250.00 108,060.00 110,250.00
3 7,766.00 100,000.00 0.00 7,766.00 8,342.26 7,787.19 8,342.26
4 6,989.40 0.00 1,000.00 7,989.40 8,759.37 7,787.19 8,759.37
5 7,688.34 0.00 0.00 7,688.34 9,197.34 7,787.19 9,197.34
6 8,457.18 0.00 1,000.00 9,457.18 9,657.20 7,787.19 9,657.20
7 9,302.90 0.00 0.00 9,302.90 10,140.06 7,787.19 10,140.06
8 10,233.18 0.00 1,000.00 11,233.18 10,647.07 7,787.19 11,233.18
9 11,256.50 0.00 0.00 11,256.50 11,179.42 7,787.19 11,256.50
10 1,382.14 10,000.00 0.00 1,382.14 1,425.40 945.60 1,425.40
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
C-2
<PAGE>
Value (b) is the gross payments compounded daily at an annual rate of 5%,
decreased proportionately to reflect prior withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
PART 3: DEATH OF THE OWNER -- WITH ENHANCED DEATH BENEFIT RIDER (FOR CONTRACTS
ISSUED IN HAWAII AND NEW YORK)
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are no withdrawals. The table below presents
examples of the death benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT VALUE (a) VALUE (b) VALUE (c) DEATH BENEFIT
--- -------------- ------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 106,000.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00 $ 106,000.00
2 107,060.00 1,000.00 108,060.00 100,000.00 108,060.00 108,060.00
3 117,766.00 0.00 117,766.00 100,000.00 117,766.00 117,766.00
4 105,989.40 1,000.00 106,989.40 100,000.00 117,766.00 117,766.00
5 116,588.34 0.00 116,588.34 100,000.00 117,766.00 117,766.00
6 128,247.18 1,000.00 129,247.18 100,000.00 129,247.18 129,247.18
7 141,071.90 0.00 141,071.90 100,000.00 141,071.90 141,071.90
8 155,179.08 1,000.00 156,179.08 100,000.00 156,179.08 156,179.08
9 170,696.98 0.00 170,696.98 100,000.00 170,696.98 170,696.98
10 187,766.68 0.00 187,766.68 100,000.00 187,766.68 187,766.68
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments, decreased proportionately to reflect prior
withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
C-3
<PAGE>
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the death benefit based on the hypothetical
Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE WITHDRAWAL ADJUSTMENT VALUE (a) VALUE (b) VALUE (c) DEATH BENEFIT
--- -------------- -------------- ------------ -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 106,000.00 $ 0.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00 $ 106,000.00
2 107,060.00 0.00 1,000.00 108,060.00 100,000.00 108,060.00 108,060.00
3 7,766.00 100,000.00 0.00 7,766.00 7,206.35 7,787.19 7,787.19
4 6,989.40 0.00 1,000.00 7,989.40 7,206.35 7,787.19 7,989.40
5 7,688.34 0.00 0.00 7,688.34 7,206.35 7,787.19 7,787.19
6 8,457.18 0.00 1,000.00 9,457.18 7,206.35 7,787.19 9,457.18
7 9,302.90 0.00 0.00 9,302.90 7,206.35 7,787.19 9,302.90
8 10,233.18 0.00 1,000.00 11,233.18 7,206.35 7,787.19 11,233.18
9 11,256.50 0.00 0.00 11,256.50 7,206.35 7,787.19 11,256.50
10 1,382.14 10,000.00 0.00 1,382.14 875.07 945.60 1,382.14
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments, decreased proportionately to reflect prior
withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
ALLMERICA SELECT SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF ALLMERICA SELECT SEPARATE ACCOUNT
DATED ___________, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED
FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-366-1492.
DATED _____________, 1998
1
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY.....................................................3
SERVICES...............................................................3
UNDERWRITERS...........................................................3
ANNUITY BENEFIT PAYMENTS...............................................4
PERFORMANCE INFORMATION................................................5
FINANCIAL STATEMENTS.................................................F-1
GENERAL INFORMATION AND HISTORY
Allmerica Select Separate Account (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 the fifth
oldest life insurance company in America. As of December 31, 1997, the Company
and its subsidiaries had over $16.3 billion in combined assets and over $43.8
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, 14 Sub-Accounts of the Variable Account are available under
Contract Form 3027-98 (the "Contract"). Each Sub-Account invests in a
corresponding investment portfolio of Allmerica Investment Trust ("Trust"),
Variable Insurance Products Fund ("Fidelity VIP") or T. Rowe Price
International Series, Inc. ("T. Rowe Price"). The Trust is managed by
Allmerica Financial Investment Management Services, Inc. Fidelity VIP is
managed by Fidelity Management & Research Company ("FMR"). The T. Rowe
Price International Stock Portfolio of T. Rowe Price is managed by Rowe
Price-Fleming International, Inc.
The Trust, Fidelity VIP and T. Rowe Price are open-end, diversified management
investment companies. Ten different funds of the Trust are available under the
Contract: the Select Emerging Markets Fund, Select International Equity Fund,
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Growth Fund, Select Strategic Growth Fund, Select
Growth and Income Fund, Select Income Fund and Money Market Fund. Three
portfolios of Fidelity VIP are available under the Contract: the Fidelity VIP
High Income Portfolio, Fidelity VIP Equity-Income Portfolio, and Fidelity VIP
2
<PAGE>
Growth Portfolio. One portfolio of T. Rowe Price is available under the
Contract: the T. Rowe Price International Stock Portfolio. Each Fund and
Portfolio 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
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract 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, 1997 and
1996 and for each of the three years in the period ended December 31, 1997, and
the financial statements of the Allmerica Select Separate Account of the
Company as of December 31, 1997 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
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the 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 First Allmerica and presently
is indirectly wholly owned by First Allmerica.
3
<PAGE>
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity contracts. The
Company pays commissions, not to exceed 1.0% of purchase payments, to entities
which sell the Contract. 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.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus.
There were no underwriting commissions for Contract Form 3027-98 since it was
not offered until January, 1999.
The aggregate amounts of underwriting commissions retained by Allmerica
Investments for sales of all other contracts funded by Allmerica Select
Separate Account for the years 1995, 1996 and 1997 were $2,340.85, $0 and $0
respectively.
The aggregate amounts of underwriting commissions paid to independent
broker-dealers for the years 1995, 1996 and 1997 were $729,499.28,
$1,191,290.81 and $1,394,543.26, respectively.
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 $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period..........$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period..............$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital
Losses............................................................$1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3)
divided by (2)..................................................0.000335
(5) Annual Charge (one-day equivalent of 1.40% per annum)...........0.000039
(6) Net Investment Rate (4) - (5)..................................0.000296
(7) Net Investment Factor 1.000000 + (6)............................1.000296
4
<PAGE>
(8) Accumulation Unit Value -- Current Period (1) x (7)...........$ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains of $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First and Subsequent 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 Annuitant 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
Accumulation 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 or contingent
deferred sales charge, the first monthly payment would be 44.800 multiplied by
$6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% 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 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. 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 $1.105106 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
$1.105106, which produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the present
value of remaining payments calculated at 3.5% interest. The determination of
the Commuted Value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units on which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the Commuted Value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
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
5
<PAGE>
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 ("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:
(n)
P(1 + T) = 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
The calculation of Total Return includes the annual charges against the assets
of the Sub-Account. This charge is 1.40% 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.
6
<PAGE>
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, 1997:
Yield 4.95%
Effective Yield 5.08%
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,
subtracting a charge reflecting the annual 1.40% deduction for mortality and
expense risk and the administrative charge, dividing the difference by the
value of the account at the beginning of the same period to obtain the base
period return, and then multiplying the return for a seven-day base period by
(365/7), with the resulting yield carried to the nearest hundredth of one
percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 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 Allmerica Select Separate Account.
7
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<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, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, 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.
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<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) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</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) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
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............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</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) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities........................ -- -- 22.4
Provision for deferred federal income taxes
and minority interest..................... -- -- (9.6)
--------- --------- ---------
-- -- 12.8
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</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 CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC", or the "Company")
was organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of reorganization
effective October 16, 1995 and became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The consolidated financial statements have been
prepared as if FAFLIC were organized as a stock life insurance company for all
periods presented. Thus, generally accepted accounting principles for stock life
insurance companies have been applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, 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, 1997 and 1996, and the years then ended exclude the
Closed Block related amounts. All significant intercompany accounts and
transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-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.
APY 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating 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 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 after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC, allocated to the Closed Block, assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect 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 at October 16, 1995 measured
on a GAAP basis represent the expected future post-tax income from the Closed
Block which may be recognized in income over the period the 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 October 16, 1995, the
expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the 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 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", 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.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.
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 shareholders' 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
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. 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 and real
estate 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, 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. 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.
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
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 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, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
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 6% for
life insurance and 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 are estimates of
payments to be made on property and casualty and health insurance for reported
losses and estimates of losses incurred but not reported. These liabilities are
determined using case basis evaluations and statistical analyses and represent
estimates of the ultimate cost of all losses incurred but not paid. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
current operations. Estimated amounts of salvage and subrogation on unpaid
property and casualty losses are deducted from the liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of 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. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.
Prior to demutualization, the participating life insurance in force was 16.2% of
the face value of total life insurance in force at December 31, 1994. The
premiums on participating life, health and annuity policies were 11.3% and 6.4%
of total life, health and annuity statutory premiums prior to demutualization in
1995 and 1994, respectively. Total policyholders' dividends were $23.3 million
and $32.8 million prior to demutualization in 1995 and 1994, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
L. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife 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 insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated 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 (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. 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 anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established 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
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SIGNIFICANT TRANSACTIONS
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 are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
The merger of APY 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 APY 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 by AFC. 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.
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. 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.
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0 million
which resulted in net proceeds of $197.2 million. AFC contributed $392.4 million
of these proceeds to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<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
--------- ---------- ----------- --------
--------- ---------- ----------- --------
<CAPTION>
1996
-----------------------------------------------
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....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $ 7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</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,
1997, the amortized cost and market
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, 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>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------
<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</TABLE>
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>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31 VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- --------------------------------------------- ------------------ ----- ------
<S> <C> <C> <C>
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
1995
Fixed maturities............................. $1,612.3 $23.7 $ 33.0
Equity securities............................ $ 122.2 $23.1 $ 6.9
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------
<S> <C> <C> <C>
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............................... $122.7 $ 86.6 $ 209.3
---------- ----------- -------
---------- ----------- -------
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
---------- ----------- -------
---------- ----------- -------
1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities............................................. (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................ (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
</TABLE>
(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, 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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell 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 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------
<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 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 1997, 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 BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
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
----- --------- ----- -----
----- --------- ----- -----
1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
</TABLE>
The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, 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. 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.
There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.
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. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company are realized
immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for 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 1997, 1996 and 1995. 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 gains or losses on
foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. 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. 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 the 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, 1997 was not material to the Company. 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 $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. 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 hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.
A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked swap contracts 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 the 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, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.
H. OTHER
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 $262.5 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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. 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 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
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) 1997 1996 1995
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality. Fair values of
interest rate futures were not material at December 31, 1997 and 1996.
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.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
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-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------
FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 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-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Short-Term
Commercial paper............................................................................... $ 33.0 $ 37.8
Other.......................................................................................... -- 0.6
--------- ---------
Total short-term debt............................................................................ $ 33.0 $ 38.4
--------- ---------
--------- ---------
Long-term debt................................................................................... $ 2.6 $ 2.7
--------- ---------
--------- ---------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.
During 1996, the Company utilized repurchase agreements to finance certain
investments. These 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 $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. 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) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current............................................................................ $ 83.3 $ 96.8 $ 119.7
Deferred........................................................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total................................................................................ $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<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) 1997 1996 1995
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Expected federal income tax expense.................................................. $ 131.8 $ 122.3 $ 105.6
Tax-exempt interest................................................................ (37.9) (35.3) (32.2)
Differential earnings amount....................................................... - (10.2) (7.6)
Dividend received deduction........................................................ (3.2) (1.6) (4.0)
Changes in tax reserve estimates................................................... 7.8 4.7 19.3
Other, net......................................................................... (1.0) 1.2 1.6
--------- --------- ---------
Federal income tax expense........................................................... $ 97.5 $ 81.1 $ 82.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). 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 liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards.......................................................................... $ (15.6) $ (16.3)
Loss reserve discounting................................................................... (391.6) (355.1)
Deferred acquisition costs................................................................. 291.8 249.4
Employee benefit plans..................................................................... (48.0) (41.4)
Investments, net........................................................................... 175.4 128.5
Bad debt reserve........................................................................... (14.3) (26.2)
Other, net................................................................................. 15.2 (5.8)
--------- ---------
Deferred tax (asset) liability, net.......................................................... $ 12.9 $ (66.9)
--------- ---------
--------- ---------
</TABLE>
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
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, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
F-25
<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 1991. 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 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
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 management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which 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 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 pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- -------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year....................................... $ 19.9 $ 19.0 $ 19.7
Interest accrued on projected benefit obligations..................................... 23.5 21.9 21.1
Actual return on assets............................................................... (64.0) (42.2) (89.3)
Net amortization and deferral......................................................... 29.0 9.3 66.1
--------- --------- ---------
Net pension expense................................................................... $ 8.4 $ 8.0 $ 17.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------
Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. 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. The
plans also hold stock of AFC.
The Company has three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $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 transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover, and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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) 1997 1996
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................... $ 40.7 $ 40.4
Fully eligible active plan participants..................................................... 7.0 7.5
Other active plan participants.............................................................. 24.1 24.4
--------- ---------
71.8 72.3
Plan assets at fair value..................................................................... -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plan assets........................ 71.8 72.3
Unrecognized prior service benefit............................................................ 15.3 23.8
Unrecognized loss............................................................................. (0.8) (5.0)
--------- ---------
Accrued postretirement benefit costs.......................................................... $ 86.3 $ 91.1
--------- ---------
--------- ---------
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost............................................................................ $ 3.0 $ 3.2 $ 4.2
Interest cost........................................................................... 4.6 4.6 6.9
Amortization of gain.................................................................... (2.8) (2.8) (0.5)
--------- --------- ---------
Net periodic postretirement benefit expense............................................. $ 4.8 $ 5.0 $ 10.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
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, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.
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. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.
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 paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 million to
FAFLIC without prior approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
the maximum dividend and other distributions that could be paid to Allmerica P&C
by Hanover, without prior approval of the Insurance Commissioner, was
approximately $127.6 million.
Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 five operating segments.
The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment 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 three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------
Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 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 1998.
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
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, 1997, 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 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.
The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 million, respectively.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</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) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................................................... $ 822.7 $ 735.7 $ 802.8
Acquisition expenses deferred................................................... 617.7 560.8 504.8
Amortized to expense during the year............................................ (476.0) (483.5) (470.3)
Adjustment to equity during the year............................................ (11.1) 9.7 (50.4)
Transferred to the Closed Block................................................. -- -- (24.8)
Adjustment for cession of term life insurance................................... -- -- (26.4)
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............................................................ $ 965.5 $ 822.7 $ 735.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</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 $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
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, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
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 $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 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. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. 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 for environmental liability
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 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 was instituted in Louisiana against AFC and certain of
its subsidiaries 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, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
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
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. 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 for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>
20. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
In July 1997, a lawsuit on behalf of a punitive class was instituted in
Louisiana against AFC and certain of its subsidiaries 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, plaintiffs voluntarily dismissed the Louisiana suit and
filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. The Company and the plaintiffs have entered into a settlement
agreement. The Court granted preliminary approval of the settlement on
December 4, 1998, and has scheduled the hearing to consider final approval
for March 1999. Although the Company believes it has meritorious defenses to
plaintiffs' claims, it concluded that this settlement was best for the
Company. Accordingly, the Company recognized a $31.0 million pre-tax expense
during the third quarter of 1998 related to this litigation. Although the
Company believes it has established an appropriate reserve, this reserve may
be revised based on changes in the Company's estimate of the ultimate cost of
the settlement.
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, relating to the Company's accident and health assumed reinsurance pool
business. These pools consist primarily of the Corporate Risk Management
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.
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Allmerica Select Separate Account of First Allmerica
Financial Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(Select Aggressive Growth, Select Growth, Select Growth and Income, Select
Income, Money Market, Select International Equity, Select Capital
Appreciation, Fidelity VIP High Income, Fidelity VIP Equity-Income, Fidelity
VIP Growth, and T. Rowe Price International Stock) constituting the Allmerica
Select Separate Account of First Allmerica Financial Life Insurance Company
at December 31, 1997, the results of each of their operations for the year
then ended 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 the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT
AGGRESSIVE SELECT GROWTH SELECT MONEY
GROWTH GROWTH AND INCOME INCOME MARKET
------------ ------------ ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... $9,476,397 $10,434,016 $15,110,324 $7,620,617 $7,086,263
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP)............. -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
------------ ------------ ----------- --------------- -----------
Total assets.............................. 9,476,397 10,434,016 15,110,324 7,620,617 7,086,263
LIABILITIES: -- -- -- -- --
------------ ------------ ----------- --------------- -----------
Net assets................................ $9,476,397 $10,434,016 $15,110,324 $7,620,617 $7,086,263
------------ ------------ ----------- --------------- -----------
------------ ------------ ----------- --------------- -----------
Net asset distribution by category:
Qualified variable annuity policies....... $3,234,352 $ 3,815,458 $ 6,243,750 $3,111,487 $3,080,811
Non-qualified variable annuity policies... 6,242,045 6,618,558 8,856,574 4,499,130 3,995,452
Value of annuitant mortality flucuation
reserve................................. -- -- 10,000 10,000 10,000
------------ ------------ ----------- --------------- -----------
$9,476,397 $10,434,016 $15,110,324 $7,620,617 $7,086,263
------------ ------------ ----------- --------------- -----------
------------ ------------ ----------- --------------- -----------
Qualified units outstanding, December 31,
1997...................................... 1,810,613 1,889,851 3,263,288 2,474,645 2,676,925
Net asset value per qualified unit, December
31, 1997.................................. $ 1.786330 $ 2.018920 $ 1.913331 $ 1.257347 $ 1.150877
Non-qualified units outstanding, December
31, 1997.................................. 3,494,340 3,278,267 4,634,103 3,586,226 3,480,348
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.786330 $ 2.018920 $ 1.913331 $ 1.257347 $ 1.150877
<CAPTION>
SELECT SELECT FIDELITY FIDELITY FIDELITY
INTERNATIONAL CAPITAL VIP VIP VIP
EQUITY APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH
----------------- ------------- ----------------- ----------- -----------
<S> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... $7,184,707 $3,200,486 $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP)............. -- -- 3,938,375 5,800,434 3,739,434
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
----------------- ------------- ----------------- ----------- -----------
Total assets.............................. 7,184,707 3,200,486 3,938,375 5,800,434 3,739,434
LIABILITIES: -- -- -- -- --
----------------- ------------- ----------------- ----------- -----------
Net assets................................ $7,184,707 $3,200,486 $3,938,375 $5,800,434 $3,739,434
----------------- ------------- ----------------- ----------- -----------
----------------- ------------- ----------------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity policies....... $2,314,982 $1,074,703 $1,232,907 $2,222,624 $1,597,168
Non-qualified variable annuity policies... 4,869,725 2,125,783 2,705,468 3,577,810 2,142,266
Value of annuitant mortality flucuation
reserve................................. -- -- -- -- --
----------------- ------------- ----------------- ----------- -----------
$7,184,707 $3,200,486 $3,938,375 $5,800,434 $3,739,434
----------------- ------------- ----------------- ----------- -----------
----------------- ------------- ----------------- ----------- -----------
Qualified units outstanding, December 31,
1997...................................... 1,653,641 642,766 861,909 1,310,787 938,970
Net asset value per qualified unit, December
31, 1997.................................. $ 1.399930 $ 1.671998 $ 1.430437 $ 1.695641 $ 1.700979
Non-qualified units outstanding, December
31, 1997.................................. 3,478,550 1,271,402 1,891,359 2,110,004 1,259,431
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.399930 $ 1.671998 $ 1.430437 $ 1.695641 $ 1.700979
<CAPTION>
T. ROWE
PRICE
INTERNATIONAL
STOCK
-----------
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... $ --
Investments in shares of Fidelity Variable
Insurance Products Fund (VIP)............. --
Investment in shares of T. Rowe Price
International Series, Inc................. 2,070,889
-----------
Total assets.............................. 2,070,889
LIABILITIES: --
-----------
Net assets................................ $2,070,889
-----------
-----------
Net asset distribution by category:
Qualified variable annuity policies....... $ 801,721
Non-qualified variable annuity policies... 1,269,168
Value of annuitant mortality flucuation
reserve................................. --
-----------
$2,070,889
-----------
-----------
Qualified units outstanding, December 31,
1997...................................... 655,509
Net asset value per qualified unit, December
31, 1997.................................. $1.223051
Non-qualified units outstanding, December
31, 1997.................................. 1,037,707
Net asset value per non-qualified unit,
December 31, 1997......................... $1.223051
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT SELECT
AGGRESSIVE SELECT GROWTH SELECT MONEY INTERNATIONAL
GROWTH GROWTH AND INCOME INCOME MARKET EQUITY
----------- ----------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 30,122 $ 164,696 $ 398,454 $ 389,995 $ 162,711
----------- ----------- ----------- --------- --------- -------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 97,677 99,600 152,333 79,346 90,527 74,259
Administrative expense fees............... 12,073 12,310 18,827 9,807 11,189 9,179
----------- ----------- ----------- --------- --------- -------------
Total expenses.......................... 109,750 111,910 171,160 89,153 101,716 83,438
----------- ----------- ----------- --------- --------- -------------
Net investment income (loss).............. (109,750) (81,788) (6,464) 309,301 288,279 79,273
----------- ----------- ----------- --------- --------- -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 738,256 533,528 1,289,372 -- -- 226,524
Net realized gain from sales of
investments............................. 110,331 168,978 233,067 12,636 -- 73,807
----------- ----------- ----------- --------- --------- -------------
Net realized gain....................... 848,587 702,506 1,522,439 12,636 -- 300,331
Net unrealized gain (loss)................ 433,986 1,513,166 720,606 170,667 -- (270,595)
----------- ----------- ----------- --------- --------- -------------
Net realized and unrealized gain........ 1,282,573 2,215,672 2,243,045 183,303 -- 29,736
----------- ----------- ----------- --------- --------- -------------
Net increase in net assets from
operations............................ $1,172,823 $ 2,133,884 $2,236,581 $ 492,604 $ 288,279 $ 109,009
----------- ----------- ----------- --------- --------- -------------
----------- ----------- ----------- --------- --------- -------------
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY T. ROWE PRICE
CAPITAL VIP VIP VIP INTERNATIONAL
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH STOCK
------------ ----------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $125,217 $ 44,175 $ 13,120 $ 18,896
------------ ----------- ------------ --------- -------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 31,386 34,372 50,142 33,250 22,513
Administrative expense fees............... 3,880 4,248 6,197 4,109 2,783
------------ ----------- ------------ --------- -------------
Total expenses.......................... 35,266 38,620 56,339 37,359 25,296
------------ ----------- ------------ --------- -------------
Net investment income (loss).............. (35,266) 86,597 (12,164) (24,239) (6,400)
------------ ----------- ------------ --------- -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 15,477 222,104 58,731 26,769
Net realized gain from sales of
investments............................. 16,394 23,743 43,755 21,659 29,447
------------ ----------- ------------ --------- -------------
Net realized gain....................... 16,394 39,220 265,859 80,390 56,216
Net unrealized gain (loss)................ 373,664 298,366 652,026 442,576 (39,938)
------------ ----------- ------------ --------- -------------
Net realized and unrealized gain........ 390,058 337,586 917,885 522,966 16,278
------------ ----------- ------------ --------- -------------
Net increase in net assets from
operations............................ $354,792 $424,183 $905,721 $ 498,727 $ 9,878
------------ ----------- ------------ --------- -------------
------------ ----------- ------------ --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SELECT AGGRESSIVE SELECT GROWTH
GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------- ------------------------- ------------------------
1997 1996 1997 1996 1997 1996
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (109,750) $ (63,849) $ (81,788) $ (39,323) $ (6,464) $ 3,734
Net realized gain....... 848,587 444,243 702,506 793,502 1,522,439 671,086
Net unrealized gain
(loss)................ 433,986 258,540 1,513,166 (50,436) 720,606 525,985
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets from
operations............ 1,172,823 638,934 2,133,884 703,743 2,236,581 1,200,805
------------ ----------- ------------ ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 1,300,394 227,822 1,484,753 258,737 2,059,378 369,437
Withdrawals............. (323,816) (87,887) (500,965) (79,238) (489,863) (122,535)
Annuity benefits........ (178,269) -- (131,609) -- (202,601) --
Other transfers from
(to) the General
Account of
First Allmerica
Financial Life
Insurance
Company (Sponsor)..... 1,381,154 2,221,463 2,052,261 1,750,035 2,528,277 2,666,288
Net decrease in
investment by First
Allmerica Financial
Life Insurance Company
(Sponsor)............. -- -- -- -- -- --
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets from capital
transactions.......... 2,179,463 2,361,398 2,904,440 1,929,534 3,895,191 2,913,190
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets................ 3,352,286 3,000,332 5,038,324 2,633,277 6,131,772 4,113,995
NET ASSETS:
Beginning of year......... 6,124,111 3,123,779 5,395,692 2,762,415 8,978,552 4,864,557
------------ ----------- ------------ ----------- ----------- -----------
End of year............... $ 9,476,397 $ 6,124,111 $ 10,434,016 $ 5,395,692 $15,110,324 $ 8,978,552
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
<CAPTION>
SELECT INCOME MONEY MARKET
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 309,301 $ 248,869 $ 288,279 $ 206,606
Net realized gain....... 12,636 3,383 -- --
Net unrealized gain
(loss)................ 170,667 (137,363) -- --
----------- ----------- ----------- -----------
Net increase in net
assets from
operations............ 492,604 114,889 288,279 206,606
----------- ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 1,106,933 267,963 12,886,102 18,102,537
Withdrawals............. (229,603) (139,802) (465,748) (536,885)
Annuity benefits........ (8,792) -- -- --
Other transfers from
(to) the General
Account of
First Allmerica
Financial Life
Insurance
Company (Sponsor)..... 471,047 828,538 (12,327,900) (15,356,737)
Net decrease in
investment by First
Allmerica Financial
Life Insurance Company
(Sponsor)............. -- -- -- --
----------- ----------- ----------- ------------
Net increase in net
assets from capital
transactions.......... 1,339,585 956,699 92,454 2,208,915
----------- ----------- ----------- ------------
Net increase in net
assets................ 1,832,189 1,071,588 380,733 2,415,521
NET ASSETS:
Beginning of year......... 5,788,428 4,716,840 6,705,530 4,290,009
----------- ----------- ----------- ------------
End of year............... $ 7,620,617 $ 5,788,428 $ 7,086,263 $ 6,705,530
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT SELECT FIDELITY VIP
INTERNATIONAL EQUITY CAPITAL APPRECIATION HIGH INCOME
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------- ------------------------- ------------------------
1997 1996 1997 1996 1997 1996
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 79,273 $ 42,325 $ (35,266) $ (16,888) $ 86,597 $ 15,424
Net realized gain....... 300,331 27,379 16,394 4,825 39,220 5,967
Net unrealized gain
(loss)................ (270,595) 580,307 373,664 22,279 298,366 77,404
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets from
operations............ 109,009 650,011 354,792 10,216 424,183 98,795
------------ ----------- ------------ ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 1,176,653 228,557 455,314 129,008 858,576 106,501
Withdrawals............. (224,414) (68,186) (178,753) (15,630) (194,883) (24,484)
Annuity benefits........ (26,708) -- (3,860) (1,247) (3,226) --
Other transfers from
(to) the General
Account of
First Allmerica
Financial Life
Insurance
Company (Sponsor)..... 1,427,921 1,770,211 546,715 1,362,872 1,254,158 1,119,571
Net decrease in
investment by First
Allmerica Financial
Life Insurance Company
(Sponsor)............. -- (131) -- (293) -- (244)
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets from capital
transactions.......... 2,353,452 1,930,451 819,416 1,474,710 1,914,625 1,201,344
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets................ 2,462,461 2,580,462 1,174,208 1,484,926 2,338,808 1,300,139
NET ASSETS:
Beginning of year......... 4,722,246 2,141,784 2,026,278 541,352 1,599,567 299,428
------------ ----------- ------------ ----------- ----------- -----------
End of year............... $ 7,184,707 $ 4,722,246 $ 3,200,486 $ 2,026,278 $ 3,938,375 $ 1,599,567
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
<CAPTION>
T. ROWE PRICE
FIDELITY VIP FIDELITY VIP INTERNATIONAL
EQUITY-INCOME GROWTH STOCK
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------ ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (12,164) $ (16,999) $ (24,239) $ (11,820) $ (6,400) $ 2,054
Net realized gain....... 265,859 35,856 80,390 24,929 56,216 12,416
Net unrealized gain
(loss)................ 652,026 154,372 442,576 71,984 (39,938) 76,953
----------- ----------- ----------- ---------- ---------- ----------
Net increase in net
assets from
operations............ 905,721 173,229 498,727 85,093 9,878 91,423
----------- ----------- ----------- ---------- ---------- ----------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 1,138,625 137,607 608,512 104,528 308,489 104,085
Withdrawals............. (244,710) (42,383) (158,181) (17,551) (150,476) (7,992)
Annuity benefits........ -- (1,360) -- (1,375) (67,027) (1,307)
Other transfers from
(to) the General
Account of
First Allmerica
Financial Life
Insurance
Company (Sponsor)..... 1,582,569 1,639,883 937,757 1,358,790 562,123 939,704
Net decrease in
investment by First
Allmerica Financial
Life Insurance Company
(Sponsor)............. -- (266) -- (279) -- (234)
----------- ----------- ----------- ---------- ---------- ----------
Net increase in net
assets from capital
transactions.......... 2,476,484 1,733,481 1,388,088 1,444,113 653,109 1,034,256
----------- ----------- ----------- ---------- ---------- ----------
Net increase in net
assets................ 3,382,205 1,906,710 1,886,815 1,529,206 662,987 1,125,679
NET ASSETS:
Beginning of year......... 2,418,229 511,519 1,852,619 323,413 1,407,902 282,223
----------- ----------- ----------- ---------- ---------- ----------
End of year............... $ 5,800,434 $ 2,418,229 $ 3,739,434 $1,852,619 $2,070,889 $1,407,902
----------- ----------- ----------- ---------- ---------- ----------
----------- ----------- ----------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Allmerica Select Separate Account (Allmerica Select) is a separate
investment account of First Allmerica Financial Life Insurance Company (the
Company), 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. The Company is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of Allmerica Select are clearly identified and
distinguished from the other assets and liabilities of the Company. Allmerica
Select cannot be charged with liabilities arising out of any other business of
the Company.
Allmerica Select is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Allmerica Select
currently offers eleven Sub-Accounts. Each Sub-Account invests exclusively in a
corresponding investment portfolio of Allmerica Investment Trust (the Trust)
managed by Allmerica Investment Management Company, Inc., a wholly-owned
subsidiary of the Company; or of the Variable Insurance Products Fund (Fidelity
VIP) managed by Fidelity Management and Research Company (FMR), or of the T.
Rowe Price International Series, Inc. (T. Rowe Price) managed by Rowe
Price-Fleming International, Inc. The Trust, Fidelity VIP, and T. Rowe Price
(the Funds) are open-end, diversified management investment companies registered
under the 1940 Act.
Allmerica Select 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.
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 Trust, Fidelity VIP, or T. Rowe
Price. 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 Trust, Fidelity VIP, and T. Rowe Price 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 Allmerica Select. Therefore, no provision for income taxes has been charged
against Allmerica Select.
ANNUITANT MORTALITY FLUCTUATION RESERVE -- A strengthening reserve is
required for doing business in the State of New York. The purpose of the reserve
is to provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
SA-5
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
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 Trust, Fidelity VIP, and T. Rowe Price at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ------------------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
Select Aggressive Growth............................... 4,259,055 $ 8,279,757 $ 2.225
Select Growth.......................................... 5,761,466 8,698,913 1.811
Select Growth and Income............................... 9,736,033 13,365,997 1.552
Select Income.......................................... 7,456,573 7,409,790 1.022
Money Market........................................... 7,086,263 7,086,263 1.000
Select International Equity............................ 5,357,723 6,689,829 1.341
Select Capital Appreciation............................ 1,885,967 2,777,490 1.697
Fidelity VIP High Income............................... 290,013 3,556,359 13.580
Fidelity VIP Equity-Income............................. 238,898 4,958,670 24.280
Fidelity VIP Growth.................................... 100,793 3,230,902 37.100
T. Rowe Price International Stock...................... 162,550 2,025,476 12.740
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% 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 A3020-92 (Allmerica Select Resource I), a
contract fee of $30 is currently deducted on the contract anniversary date and
upon full surrender of the contract. For contracts issued on Form 3025-96,
(Allmerica Select Resource II) a $30 fee is deducted on the contract anniversary
and upon full surrender if the accumulated value is less than $50,000 and is
currently waived for contracts issued to the trustee of a 401(k) plan. For the
years ended December 31, 1997 and 1996, contract fees deducted from accumulated
value in Allmerica Select amounted to $30,384 and $14,223, respectively. These
amounts are included on the statements of changes in net assets with other
transfers to the General Account.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is the principal underwriter and general distributor
of Allmerica Select, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
broker-dealers who are registered under the Securities Exchange Act of 1934 and
are members of the National Association of Securities Dealers. As the current
series of contracts have a contingent deferred sales charge, no deduction is
made for sales charges at the time of the sale. For the years ended December 31,
1997 and 1996, the Company received $74,527 and $8,519, respectively, for
contingent deferred sales charges applicable to Allmerica Select.
SA-6
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
----------------------------- -----------------------------
UNITS AMOUNT UNITS AMOUNT
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Select Aggressive Growth
Issuance of Units.............................. 2,170,858 $ 3,531,841 1,800,429 $ 2,614,644
Redemption of Units............................ (879,294) (1,352,378) (180,009) (253,246)
------------- -------------- ------------- --------------
Net increase................................. 1,291,564 $ 2,179,463 1,620,420 $ 2,361,398
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Select Growth
Issuance of Units.............................. 2,499,484 $ 4,191,599 1,502,416 $ 2,129,430
Redemption of Units............................ (864,979) (1,287,159) (145,366) (199,896)
------------- -------------- ------------- --------------
Net increase................................. 1,634,505 $ 2,904,440 1,357,050 $ 1,929,534
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Select Growth and Income
Issuance of Units.............................. 3,422,133 $ 5,847,704 2,253,514 $ 3,272,600
Redemption of Units............................ (1,194,642) (1,952,513) (256,622) (359,410)
------------- -------------- ------------- --------------
Net increase................................. 2,227,491 $ 3,895,191 1,996,892 $ 2,913,190
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Select Income
Issuance of Units.............................. 1,926,973 $ 2,290,556 1,494,780 $ 1,679,252
Redemption of Units............................ (822,581) (950,971) (652,456) (722,553)
------------- -------------- ------------- --------------
Net increase................................. 1,104,392 $ 1,339,585 842,324 $ 956,699
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Money Market
Issuance of Units.............................. 14,757,146 $ 16,004,652 17,628,843 $ 19,199,274
Redemption of Units............................ (14,660,054) (15,912,198) (15,596,019) (16,990,359)
------------- -------------- ------------- --------------
Net increase................................. 97,092 $ 92,454 2,032,824 $ 2,208,915
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Select International Equity
Issuance of Units.............................. 2,289,621 $ 3,119,023 3,083,193 $ 2,110,023
Redemption of Units............................ (638,644) (765,571) (1,500,522) (179,572)
------------- -------------- ------------- --------------
Net increase................................. 1,650,977 $ 2,353,452 1,582,671 $ 1,930,451
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Select Capital Appreciation
Issuance of Units.............................. 1,141,176 $ 1,618,028 994,688 $ 1,504,957
Redemption of Units............................ (592,787) (798,612) (20,347) (30,247)
------------- -------------- ------------- --------------
Net increase................................. 548,389 $ 819,416 974,341 $ 1,474,710
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Fidelity VIP High Income
Issuance of Units.............................. 1,986,582 $ 2,576,961 1,184,751 $ 1,276,228
Redemption of Units............................ (530,994) (662,336) (160,196) (74,884)
------------- -------------- ------------- --------------
Net increase................................. 1,455,588 $ 1,914,625 1,024,555 $ 1,201,344
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
SA-7
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
----------------------------- -----------------------------
UNITS AMOUNT UNITS AMOUNT
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Fidelity VIP Equity-Income
Issuance of Units.............................. 2,190,816 $ 3,257,394 1,564,012 $ 1,976,730
Redemption of Units............................ (571,886) (780,910) (191,624) (243,249)
------------- -------------- ------------- --------------
Net increase................................. 1,618,930 $ 2,476,484 1,372,388 $ 1,733,481
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Fidelity VIP Growth
Issuance of Units.............................. 1,180,721 $ 1,753,002 1,123,334 $ 1,522,502
Redemption of Units............................ (308,700) (364,914) (58,835) (78,389)
------------- -------------- ------------- --------------
Net increase................................. 872,021 $ 1,388,088 1,064,499 $ 1,444,113
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
T. Rowe Price International Stock
Issuance of Units.............................. 931,979 $ 1,070,837 1,010,810 $ 1,152,730
Redemption of Units............................ (409,141) (417,728) (105,544) (118,474)
------------- -------------- ------------- --------------
Net increase................................. 522,838 $ 653,109 905,266 $ 1,034,256
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</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 Allmerica Select satisfies the current
requirements of the regulations, and it intends that Allmerica Select will
continue to meet such requirements.
SA-8
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, and T.
Rowe Price shares by Allmerica Select during the year ended December 31, 1997,
were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Select Aggressive Growth.......................................... $ 3,638,730 $ 830,761
Select Growth..................................................... 4,394,802 1,038,622
Select Growth and Income.......................................... 6,621,538 1,443,439
Select Income..................................................... 2,391,473 742,587
Money Market...................................................... 9,991,662 9,610,929
Select International Equity....................................... 3,181,685 522,436
Select Capital Appreciation....................................... 1,491,736 707,586
Fidelity VIP High Income.......................................... 2,538,227 521,528
Fidelity VIP Equity-Income........................................ 3,195,170 508,746
Fidelity VIP Growth............................................... 1,764,187 341,607
T. Rowe Price International Stock................................. 1,114,715 441,237
------------ ------------
Totals............................................................ $ 40,323,925 $ 16,709,478
------------ ------------
------------ ------------
</TABLE>
SA-9
<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 Allmerica Select Separate Account 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. 12 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 Registration
Statement No. 811-8116, Post-Effective Amendment No. 12
and is incorporated by reference herein.
(b) Form of Revised Commission Schedule was previously filed
on September 9, 1998 in Registrant's Initial Registration
Statement and is incorporated by reference herein. Sales
Agreements (Select) with Commission Schedule were
previously filed on April 24, 1998 in Registration
Statement No. 811-8116, Post-Effective Amendment No. 12
and are incorporated by reference herein.
(c) General Agent's Agreement was previously filed on
April 24, 1998 in Registration Statement No. 811-8116,
Post-Effective Amendment No. 12 and is incorporated by
reference herein.
(d) Career Agent Agreement was previously filed on April 24,
1998 in Registration Statement No. 811-8116,
Post-Effective Amendment No. 12 and is incorporated by
reference herein.
(e) Registered Representative's Agreement was previously filed
on April 24, 1998 in Registration Statement No. 811-8116,
Post-Effective Amendment No. 12 and is incorporated by
reference herein.
EXHIBIT 4 Draft Contract Form 3027-98 is filed herewith.
EXHIBIT 5 Application Form AS-495 is filed herewith.
EXHIBIT 6 Articles of Incorporation were previously filed on April 30, 1996
in Post-Effective Amendment No. 4, which was effective on October
16, 1995, and are incorporated by reference herein. Revised
Bylaws were previously filed on April 30, 1996 in Post-Effective
Amendment No. 4 and are incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Service Agreement was previously filed on April
30, 1996 in Post-Effective Amendment No. 4 and is
incorporated by reference herein.
(b) An Amendment to the Fidelity Service Agreement, effective as
of January 1, 1997, was previously filed on April 30, 1997
in Post-Effective Amendment No. 7 and is incorporated by
reference herein.
<PAGE>
(c) Fidelity Service Contract, effective as of January 1, 1997.
was previously filed on April 30, 1997 in Post-Effective
Amendment No. 7 and is incorporated by reference herein.
(d) T. Rowe Price Service Agreement was previously filed on
April 24, 1998 in Registration Statement No. 811-8116,
Post-Effective Amendment No. 12 and is incorporated by
reference herein.
(c) BFDS Agreements for lockbox and mailroom services were
previously filed on April 24, 1998 in Registration
Statement No. 811-8116, Post-Effective Amendment No. 12
and are incorporated by reference herein.
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 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement between the Company and Allmerica
Investment Trust was previously filed on April 24, 1998 in
Registration Statement No. 811-8116, Post-Effective
Amendment No. 12 and is incorporated by reference herein.
(b) Participation Agreement between the Company and Fidelity
VIP, as amended, was previously filed on April 24, 1998 in
Registration Statement No. 811-8116, Post-Effective
Amendment No. 12 and is incorporated by reference herein.
(c) Participation Agreement between the Company and T. Rowe
Price International Series, Inc. was previously filed on
April 24, 1998 in Registration Statement No. 811-8116,
Post-Effective Amendment No. 12 and is incorporated by
reference herein.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice
Director President, First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel,
Secretary and Counsel First Allmerica since 1991
Warren E. Barnes Vice President and Corporate Controller of First
Vice President and Corporate Controller Allmerica since 1998; Vice President and
Co-Controller, First Allmerica 1997; Vice President
and Assistant Controller, First Allmerica 1996 to
1997; Assistant Vice President and Assistant
Controller, First Allmerica 1995 to 1996; Assistant
Vice President Corporate Accounting and Reporting,
First Allmerica 1993 to 1995
Robert E. Bruce Director and Chief Information Officer of First
Director and Chief Information Officer Allmerica since 1997; Vice President of First
Allmerica since 1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
</TABLE>
<PAGE>
<TABLE>
<S> <C>
John P. Kavanaugh Director and Chief Investment Officer of First
Director, Vice President and Allmerica since 1996; Vice President, First
Chief Investment Officer Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996; Senior Vice
Director, Vice President and President, First Allmerica since 1986; General
General Counsel Counsel, First Allmerica since 1981; Assistant
Secretary, First Allmerica since 1991
J. Barry May Director of First Allmerica since 1996; Director and
Director President, The Hanover Insurance Company since
1996; Vice President, The Hanover Insurance
Company, 1993 to 1996; General Manager, The
Hanover Insurance Company 1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996; Director of
Director Citizens Insurance Company of America since
1992, President since 1994, and CEO since 1996;
Vice President, First Allmerica 1982 to 1994; Chief
Investment Officer, First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board, President and
Director, Chairman of the Board, Chief Executive Officer, First Allmerica since 1989
President and Chief Executive Officer
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and
Chief Financial Officer and Treasurer and Treasurer, First Allmerica since 1993; Assistant
Vice President 1992 to 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Director,
Allmerica Investments, Inc. since 1990; Director
and President, Allmerica Financial Investment
Management Services, Inc. since 1990
Robert P. Restrepo, Jr. Chief Executive Officer of Travelers Property &
Director and Vice President Casualty Company 1996-1998; Senior Vice President
of Aetna Life & Casualty Company 1993-1996
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Chief
Financial Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1987
</TABLE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
See attached organization chart.
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _____________________ _____________
| |
100% 100%
SMA First Sterling
Financial Corp. Reinsurance
Company
Limited
Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________ ______|_______
| | | | |
100% 100% 100% 100% 100%
APC The Hanover Allmerica Citizens Somerset
Funding Corp. Insurance Financial Insurance Square, Inc.
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois Massachusetts
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Plus American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | -------------- Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
-------------- Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of The Hanover
Insurance Company
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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
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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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 100 North Parkway Multi-line property and casualty insurance
Company Worcester MA 01605
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance Brokers, 440 Lincoln Street Insurance Broker
Inc. Worcester MA 01653
Allmerica Financial Life Insurance and 440 Lincoln Street Life insurance, accident and
Annuity Company (formerly known as Worcester MA 01653 health insurance, annuities,
SMA Life Assurance Company) variable 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
Worcester MA 01653 for 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.)
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
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 440 Lincoln Street Holding Company
Companies, Inc. 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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
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 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company 8101 N. High Street Multi-line property and casualty
of Ohio P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity, accident
Insurance Company (formerly Worcester MA 01653 and health insurance company
State Mutual Life Assurance
Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance 440 Lincoln Street
Company Limited Worcester MA 01653 Reinsurance Company
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover
Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty
Richardson TX 75081 insurance
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
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
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of October 30, 1998 there were 943 Contract Owners of qualified
Contracts and 1,477 Contract Owners of non-qualified contracts funded
by the Registrant under Registration Statement No. 33-71058.
As of October 30, 1998 there were no Contract Form 3027-98 Owners since
sales had not yet begun.
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 any 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 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:
- VEL Account, VEL II Account, VEL Account III, Select Account III,
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
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account, and
Allmerica Select Separate Account of First Allmerica Financial Life
Insurance Company.
- Allmerica Investment Trust
<PAGE>
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer and
Controller
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
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
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of 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
Effective March 31, 1995, the Company provides daily unit value
calculations and related services for the Company's separate accounts.
<PAGE>
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned Registrant hereby
undertakes to file with the Securities and Exchange Commission
("SEC") such supplementary and periodic information, documents,
and reports as may be prescribed by any rule or regulation of
the SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(b) The Registrant hereby undertakes to include as part of the
application to purchase a Contract a space that the applicant can
check to request a Statement of Additional Information.
(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 Contracts 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 ("First Allmerica"), 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.
<PAGE>
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 to its Registration Statement under the Securities Act of 1933 and
amendment under the Investment Company Act of 1940 to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Worcester, and
Commonwealth of Massachusetts on the 17th day of December, 1998.
ALLMERICA SELECT SEPARATE ACCOUNT OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Abigail M. Armstrong
-----------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the date indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ John F. O'Brien Director, President and Chief November 17, 1998
- ------------------------- Executive Officer
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President
- -------------------------
Bruce C. Anderson
/s/ Warren E. Barnes Vice President and
- ------------------------- Corporate Controller
Warren E. Barnes
/s/ Robert E. Bruce Director, Vice President and
- ------------------------- Chief Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and
- ------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President and
- ------------------------- General Counsel
John F. Kelly
/s/ J. Barry May Director
- -------------------------
J. Barry May
/s/ James R. McAuliffe Director
- -------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief
- ------------------------- Financial Officer (Controller)
Edward J. Parry, III and Treasurer
/s/ Richard M. Reilly Director and Vice President
- -------------------------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President
- --------------------------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President
- -------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President
- -------------------------
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 4 Draft Contract Form 3027-98
Exhibit 5 Application Form AS-495
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
<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.
VALUES REMOVED FROM A GUARANTEE PERIOD ACCOUNT PRIOR TO THE END OF ITS
GUARANTEE PERIOD MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT THAT MAY
INCREASE OR DECREASE THE VALUES. A NEGATIVE MARKET VALUE ADJUSTMENT WILL
NEVER BE APPLIED TO THE DEATH BENEFIT. A POSITIVE MARKET VALUE ADJUSTMENT,
IF APPLICABLE, WILL BE ADDED TO THE DEATH BENEFIT WHEN THE BENEFIT PAID IS
THE CERTIFICATE'S ACCUMULATED VALUE. PLEASE REFER TO THE MARKET VALUE
ADJUSTMENT 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 the gross payments.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Home Office: Worcester, Massachusetts
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
This certificate is a legal contract 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 benefits beginning on the Annuity
Date or to pay a death benefit to the Beneficiary if an Owner dies prior to
the Annuity Date.
/s/ John F. O'Brien /s/ Abigail M. Armstrong
President Secretary
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY
NON-PARTICIPATING
1
<PAGE>
TABLE OF CONTENTS
SPECIFICATIONS...........................................................3
DEFINITIONS..............................................................5
OWNER, ANNUITANT AND BENEFICIARY.........................................7
PAYMENTS.................................................................8
VALUES...................................................................8
TRANSFERS...............................................................10
WITHDRAWAL AND SURRENDER................................................11
DEATH BENEFIT...........................................................12
ANNUITY BENEFIT.........................................................13
ANNUITY OPTION TABLES...................................................16
GENERAL PROVISIONS......................................................19
2
<PAGE>
SPECIFICATIONS
<TABLE>
<S> <C> <C> <C>
Certificate Type: [NQ] Certificate Number: [AQ00600000]
Issue Date: [ ] Annuity Date: [xx/xx/xx]
Owner: [ ] Owner Date of Birth: [xx/xx/xx]
Joint Owner: [ ] Joint Owner Date of Birth: [xx/xx/xx]
Annuitant: [ ] Annuitant Date of Birth: [xx/xx/xx]
Joint Annuitant: [ ] Joint Annuitant Date of Birth: [xx/xx/xx]
Annuitant Sex: [ ] Primary Beneficiary: [ ]
Joint Annuitant Sex: [ ] Contingent Beneficiary: [ ]
</TABLE>
Minimum Fixed Account Guaranteed Interest Rate: 3%
Minimum Additional Payment: $100.00
Minimum Guarantee Period Account Interest Rate: 3%
Minimum Guarantee Period $1,000.00
Account Allocation Amount:
Minimum Withdrawal Amount: $100.00
Minimum Annuity Benefit Payment: $20.00
Maximum Alternative Annuity Date: [xx/xx/xx]
Certificate Fee: $35, if the Accumulated Value is less than
$75,000.00; otherwise $0
Sub-Account Charges:
Mortality and Expense Risk Charge: 1.25% 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.
With combined annual Sub-Account charges of 1.40%, the smallest rate of
investment return required to ensure that the dollar amount of variable
annuity payments does not decrease is 4.90% for variable annuity options
based on an annual rate of 3 1/2%.
[Enhanced Death Benefit Rider [.25%]
Annual Percentage Rate Charge:]
Principal Office: 440 Lincoln Street, Worcester, Massachusetts
01653 [1-800-366-1492]
3
<PAGE>
SPECIFICATIONS (continued)
Owner: [ ] Certificate Number: [AQ0000000]
Joint Owner: [ ]
Initial Net Payment: $25,000.00
Initial Net Payment Allocation:
VARIABLE SUB-ACCOUNTS:
[Select Emerging Markets Select Gr. & Inc.
Select Int'l Equity Fidelity VIP Eq. Inc.
T. Rowe Price Int'l Fidelity VIP High Inc.
Select Aggr. Growth Select Income
Select Capital Appr. Allmerica Money Mkt.]
Select Value Opp.
Select Growth
Select Strategic Gr.
Fidelity VIP Growth
[You may invest in up to 17 Variable Sub-Accounts over the life of
the certificate.]
FIXED ACCOUNT
Initial Interest Rate:
GUARANTEE PERIOD ACCOUNTS
<TABLE>
<CAPTION>
Guaranteed
Guarantee Interest Expiration
Period Rate Date
------------ --------------- -------------------
<S> <C> <C> <C>
[3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years]
_____
100% TOTAL
</TABLE>
4
<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 At issue, the person whose age is used to determine the
Annuity Date. 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 based upon the age of the Owner. The Annuity
Date is shown on the Specifications page. The Annuity
Date can be changed to the Maximum Alternative Annuity
Date (see Specifications Page), which is the first of
the month prior to the Owner's 90th Birthday.
ANNUITY UNIT A measure used to calculate annuity benefit payments
under a variable annuity option.
BENEFICIARY The person, persons or entity entitled to the annuity
benefit prior to the Annuity Date or any annuity
benefit payments upon the death of an Owner who is not
also an Annuitant on or after the Annuity Date.
CERTIFICATE YEAR A one-year period based on the date of issue or an
anniversary thereof.
COMPANY First Allmerica Financial Life Insurance Company.
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. 3027 owned by
the First Allmerica Financial Life Insurance Company
Group Annuity Trust.
GUARANTEE PERIOD The number of years that a Guaranteed Interest Rate may
be credited to a Guarantee Period Account. The
Guarantee Period may range from two to ten years.
GUARANTEE PERIOD An account which corresponds to a Guaranteed
ACCOUNT Interest Rate for a specified Guarantee Period and
is supported by assets in a Separate Account.
GUARANTEED INTEREST The annual effective rate of interest after daily
RATE compounding credited to a Guarantee Period Account.
MARKET VALUE A positive or negative adjustment to earnings in a
ADJUSTMENT Guarantee Period Account assessed if any portion of a
Guarantee Period Account is withdrawn or transferred
prior to the end of its Guarantee Period.
OWNER The person, persons or entity entitled to exercise
the rights and privileges under this certificate.
Joint Owners are permitted if one of the two is an
Annuitant and unless otherwise indicated, any
reference to Owner shall include joint Owners.
5
<PAGE>
PRINCIPAL OFFICE The Company's office at 440 Lincoln Street, Worcester,
Massachusetts, 01653.
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.
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.
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.
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 so
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.
WRITTEN REQUEST A request or notice in writing satisfactory to the
OR WRITTEN NOTICE Company and filed at the Principal Office.
6
<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 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 the
certificate is owned jointly, 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 received Written Notice and recorded the change
at the Principal Office. The Company will not be
deemed to know of the assignment until it has
received Written Notice. 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 Annuitant and the
Beneficiary will be subject to any assignment.
ANNUITANT The Annuitant will be as shown on the Specifications
page unless 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 an Annuitant dies and a
replacement is not named, the Owner will be considered
to be the new Annuitant.
A change of Annuitant will take place only when the
Company has received Written Notice and recorded the
change at the Principal Office. The Company will not
be deemed to know of the change of Annuitant until it
has received Written Notice. 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.
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 an 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 on a
Beneficiary designation form 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 the Owner or
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 death benefits provided by 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, the deceased
Beneficiary's interest will pass to the Owner or the
Owner's estate.
7
<PAGE>
PROTECTION OF To the extent allowed by law, this certificate and any
PROCEEDS payments made under it will be exempt from the claims
of creditors. Neither the Annuitant nor the Beneficiary
can assign, transfer, commute, anticipate or encumber
the proceeds or payments unless given that right by
the Owner.
PAYMENTS
INITIAL PAYMENT The Initial Payment is shown on the Specifications page.
ADDITIONAL PAYMENTS Prior to the Annuity Date and while the certificate is
in force, the Owner may make additional payments of at
least the Minimum Additional Payment (see
Specifications page). Total payments made may not
exceed $5,000,000 without the Company's consent.
NET PAYMENTS Each Net 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 tax 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.
NET PAYMENT The initial Net Payment will be allocated as shown on
ALLOCATIONS the Specifications page. Additional Net Payments
will be allocated in the same proportion as the
initial Net Payment, unless changed by the Owner.
The minimum amount that may be allocated to a
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 The value of a Sub-Account on a Valuation Date is
VARIABLE ACCOUNT determined by multiplying the Accumulation
Units in that Sub-Account by the Accumulation Unit
Value as of the Valuation Date.
Accumulation Units are credited when an amount is
allocated to a Sub-Account. The number of Accumulation
Units credited 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 as of any
VALUES 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 The net investment factor measures the investment
FACTOR performance of a Sub-Account from one Valuation Period
to the next. This factor is equal to 1.000000 plus the
result from dividing (a) by (b) and subtracting (c) and
(d) where:
(a) is the investment income of a
Sub-Account for the Valuation
Period, including realized or
unrealized capital gains and
losses during the Valuation Period,
adjusted for provisions made for
taxes, if any;
8
<PAGE>
(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
(see Specifications page); and
(d) is the Administrative Charge (see
Specifications page).
The Company assumes the risk that its actual
mortality experience and expenses 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 are credited
ACCOUNT interest at rates periodically set by Company. The
Company guarantees that the rate of interest in
effect when an amount is allocated to the Fixed
Account will remain in effect for that amount for
one year. 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.
VALUE OF THE GUARANTEE A Guarantee Period Account will be established on
PERIOD ACCOUNTS the date a Net Payment or transfer is allocated to a
specific Guarantee Period. Amounts allocated to the
same Guarantee Period 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 is guaranteed for the duration
of the Guarantee Period. Additional amounts
allocated to Guarantee Periods of the same or
different durations will result in additional
Guarantee Period Accounts, each with its own
Guaranteed Interest Rate and expiration date.
Expiration dates for Guarantee Period Accounts will
be shown on the payment confirmations and on annual
reports sent to the Owner.
The value of a Guarantee Period Account on any date
is the sum of the 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 Minimum
Guarantee Period Interest Rate (see Specifications
page.)
RENEWAL GUARANTEE At least 45 days (but not more than 75 days) prior
PERIODS to the end of a Guarantee Period, the Company will
notify the Owner in writing of the expiration of
that Guarantee Period and of the right to reallocate
and/or withdraw amounts without any Market Value
Adjustment on the day following the expiration date.
Following receipt of the Guarantee Period Account
expiration notice, the Owner may submit a written
request to withdraw the monies in the account and/or
to transfer amounts to the Sub-Accounts, the Fixed
Account and/or to a new Guarantee Period Account of
any duration then offered by the Company.
Guaranteed Interest Rates corresponding to the
available Guarantee Periods may be higher or lower
than the previous Guaranteed Interest Rate. The
Owner's reallocation/withdrawal request must clearly
indicate that the effective date of the request is
to be the date following the Guarantee Period
Account's expiration date. If the Owner's
reallocation/withdrawal request is not received at
the Principal Office by the expiration date of a
Guarantee Period Account, the day following the
expiration date the Guarantee Period Account value
will be automatically applied to a new Guarantee
Period Account with the same duration as the expired
Guarantee Period Account unless:
9
<PAGE>
(a) less than the Minimum Guarantee
Period Account Allocation (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.
If however, a reallocation/withdrawal request for
the prior Guarantee Period Account is received
within 10 days of the renewal date, the Company will
transfer and/or withdraw the payment as requested
without applying a Market Value Adjustment.
CERTIFICATE FEE The Company will deduct a certificate fee (see
Specifications page) Pro Rata on each certificate
anniversary prior to the Annuity Date and when the
certificate is surrendered.
TRANSFERS
Prior to the Annuity Date, the Owner may transfer
amounts among accounts by Written 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. In the case of a
partial transfer from a Guarantee Period Account,
the Market Value Adjustment will be applied to the
value remaining in the account.
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.
Prior to the Annuity Date, the Owner may request
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, Guarantee Period
Account or into an account that is also used as the
source account.
Automatic transfers 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 the
purpose of the transfers provision regardless of how
many Sub-Accounts are involved. Any subsequent
automatic transfers 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
transfers and to discontinue the arrangement at any
time upon advance written notice to the Owner). If
an automatic transfer would reduce the balance in
the source fund to less than $100, the entire
balance will be transferred proportionately to the
chosen Sub-Account(s). Automatic transfers will
continue unless the amount in the source fund 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.
Prior to the Annuity Date, the Owner may request
automatic rebalancing (Automatic Account
Rebalancing) of Sub-Account allocations to be made
at least as frequently as monthly, quarterly,
semi-annually or annually. The Owner will designate
the percentage allocation for amounts invested in
each of the Sub-Accounts chosen. On the periodic
10
<PAGE>
transfer dates specified by the Owner, the Company
will review the percentage allocation in the various
Sub-Accounts and, as necessary, transfer funds in
order to 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 a
transfer for purposes of the transfer provision.
The arrangement will terminate when the Owner's
request is 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
advance written notice to the Owner.)
WITHDRAWAL AND SURRENDER
Prior to the Annuity Date, the Owner may, by Written
Request, withdraw a part of the Accumulated Value or
surrender this certificate for its Surrender Value.
Any withdrawal must be at least the Minimum
Withdrawal Amount (see Specifications page). The
Written 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 Market Value Adjustment will be
applied to the value remaining in the Guarantee
Period Account.
The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in
the Sub-Accounts and/or the Fixed Account on a
monthly, bimonthly, quarterly, semi-annual or annual
basis. Systematic withdrawals from Guarantee Period
Accounts are not available. The amount of each
automatic withdrawal must meet the minimum
withdrawal requirements discussed in the paragraph
above and will be subject to any applicable
withdrawal charges. If elected prior to the
certificate's issue date, the Owner must designate
in writing the specific dollar amount of each
withdrawal and the percentage of this amount which
should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals
will not begin before the 16th day following the
issue date. If elected after the issue date, the
Owner may elect by Written Request 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 Owner may elect to withdraw 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 date the Written Request is
received at the Principal Office or, if later, on a
date specified by the Owner.
Systematic withdrawals will automatically cease on
the Annuity Date. The Owner may change or terminate
systematic withdrawals by Written 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 Valuation Date.
Amounts taken from the Variable Account will be paid
within 7 days of the date a Written 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
a 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 is not
reasonably practicable.
11
<PAGE>
Amounts taken from the Fixed Account or the
Guarantee Period Accounts will normally be paid
within 7 days of receipt of a Written Request. 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 the
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.
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 or withdrawals, or to a
surrender. Amounts applied under an annuity option
are treated as withdrawals when calculating the
Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the
amount taken from each Guarantee Period Account by
the market value factor. The market value factor
for each Guarantee Period Account is equal to:
n/365
(1+i)/(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 current Guaranteed Interest Rate, the
Market Value Adjustment will decrease the Guarantee
Period Account value. Similarly, if the Guaranteed
Interest Rate being credited is higher than the 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 Guarantee Period
Account value more than the interest earned in
excess of the Minimum Guarantee Period Account
Interest Rate (see Specifications page) compounded
annually from the beginning of the current Guarantee
Period.
DEATH BENEFIT
At the death of an Owner prior to the Annuity Date,
the Company will pay to the Beneficiary a death
benefit determined as of the Valuation Date upon
receipt at the Principal Office of proof of death.
If the Owner is a non-natural person, then a death
benefit is paid on the death of an Annuitant prior
to the Annuity Date.
OWNER'S DEATH BENEFIT If an Owner dies before the Annuity Date, the death
benefit will be the greater of:
(a) the Accumulated Value increased by any
positive Market Value Adjustment; or
(b) the sum of the gross payments made under
this contract reduced proportionately to
reflect all partial withdrawals. For each
withdrawal, the proportionate reduction is
calculated as the death benefit under this
option immediately prior to the withdrawal
multiplied by the withdrawal amount and divided
by the Accumulated Value immediately prior to
the withdrawal.
12
<PAGE>
PAYMENT OF THE DEATH The death benefit will be paid to the Beneficiary
BENEFIT within 7 days of the Effective Valuation Date unless
the Owner has specified a death benefit annuity
option. Instead, the Beneficiary may, by Written
Request, elect to:
(a) defer distribution of the death benefit for a
period no more than 5 years from the date of
death; or
(b) receive a life annuity or an annuity for a
period certain not extending beyond the
Beneficiary's life expectancy. Annuity benefit
payments must begin within one year from the
date of death.
If distribution of the death benefit is deferred
under (a) or (b), any value in 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 Written 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 Written Request,
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 added 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.
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 under a
variable life annuity with payments guaranteed for
10 years will be made.
The Owner may also elect to have the death benefit
applied under a life annuity or a period certain
annuity 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 Fixed
Account. Variable annuity options may be funded
through one or more of the Sub-Accounts. Not all
Sub-Accounts may be made available.
ANNUITY BENEFIT Annuity benefit payments may be received on a
PAYMENTS monthly, quarterly, semiannual or annual basis. If
the first payment would be less than the Minimum
Annuity Benefit Payment (see Specifications page), a
single payment will be made instead. Satisfactory
proof of the date of birth of the Annuitant or
Beneficiary, whichever it applicable, must be
received at the Principal Office before life annuity
benefit payments begin. Where a life annuity option
has been elected, the Company may require
satisfactory proof that the Annuitant or
Beneficiary, whichever is applicable, is alive
before any payment is made.
13
<PAGE>
PAYMENT OF ANNUITY If an Owner, who is not also an Annuitant, dies on
BENEFIT PAYMENTS UPON or after the Annuity Date, any remaining annuity
OWNER DEATH benefit payments continue in accordance with the
terms of the annuity option selected. Upon the
death of the Owner, the Beneficiary becomes the
Owner of the certificate.
ANNUITY VALUE The amount of the first annuity benefit payment
under all available options except period certain
options will depend on the age of the Annuitant
and/or Beneficiary on the Annuity Date and the
annuity value applied. Period certain options are
based on the duration of payments and the annuity
value.
For life annuity options and non-commutable period
certain options with a duration of 6 years or more,
the annuity value will be the Accumulated Value,
including any applicable Market Value Adjustment
less any applicable premium tax. For commutable
period certain options or any period certain option
less than 6 years, the annuity value will be the
Surrender Value less any applicable premium tax.
For a death benefit annuity, the annuity value will
be the amount of the death benefit. 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.
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
interest rate 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 Two-Thirds Option, payments after
the first death are based on two-thirds the number
of Annuity Units that applied when both individuals
on whose lives the payments were based were living.
Variable annuity benefit payments will increase or
decrease with the value of annuity units. 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 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 is made.
ANNUITY BENEFIT VARIABLE OR FIXED LIFE ANNUITY WITH PAYMENTS
PAYMENT OPTIONS GUARANTEED FOR 10 YEARS: Periodic annuity benefit
payments during the Annuitant's life. If the
Annuitant dies before all guaranteed payments have
been made, the remaining guaranteed payments will
continue to the Owner.
VARIABLE OR FIXED LIFE ANNUITY: Periodic annuity
benefit payments during the Annuitant's life.
UNIT REFUND VARIABLE OR FIXED LIFE ANNUITY:
Periodic annuity benefit payments during the
Annuitant's life. If the Annuitant dies and the
annuity value initially applied to purchase the
option, divided by the first payment, exceeds the
number of payments made before the Annuitant's
death, payments will continue to the Owner until the
number of payments equals the Annuity Value divided
by the first payment.
14
<PAGE>
JOINT AND SURVIVOR VARIABLE OR FIXED LIFE ANNUITY:
Periodic annuity benefit payments during the joint
lifetime of the Annuitant and another individual
(i.e. the Beneficiary or a Joint Annuitant) with
payments continuing during the lifetime of the
survivor.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE OR FIXED LIFE
ANNUITY: Periodic annuity benefit payments during
the joint lifetime of the Annuitant and one other
individual (i.e. the Beneficiary or a joint
Annuitant) with payments continuing during the
lifetime of the survivor at two-thirds the amount
payable when both individuals were living.
VARIABLE OR FIXED ANNUITY FOR A PERIOD CERTAIN:
Periodic annuity benefit payments for a chosen
number of years. The number of years selected may
be from 1 to 30. If the payee dies before the end
of the period, remaining payments will continue to
the Owner.
ANNUITY TABLES The first annuity benefit payment will be based on
the greater of the guaranteed annuity rates shown in
the following tables or the Company's non-guaranteed
current annuity option rates applicable to this
class of certificates. Second and subsequent
annuity benefit payments, when based on the
investment experience of the Variable Account, may
increase or decrease.
15
<PAGE>
ANNUITY OPTION TABLES
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
Age Life Annuity with Life Unit Refund
Nearest Payments Guaranteed Annuity Life Annuity
Birthday for 10 Years
<S> <C> <C> <C>
50 4.20 4.22 4.12
51 4.26 4.28 4.17
52 4.32 4.35 4.23
53 4.38 4.42 4.29
54 4.45 4.49 4.35
55 4.53 4.57 4.41
56 4.60 4.65 4.48
57 4.68 4.73 4.55
58 4.77 4.83 4.63
59 4.86 4.92 4.71
60 4.95 5.03 4.79
61 5.05 5.14 4.88
62 5.16 5.26 4.97
63 5.27 5.38 5.07
64 5.39 5.52 5.17
65 5.51 5.66 5.28
66 5.64 5.82 5.39
67 5.78 5.98 5.51
68 5.92 6.16 5.64
69 6.07 6.35 5.78
70 6.23 6.56 5.92
71 6.39 6.77 6.07
72 6.56 7.01 6.23
73 6.73 7.26 6.40
74 6.91 7.54 6.57
75 7.09 7.83 6.76
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the Annuity 2000 Mortality Table.
16
<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 3.82 3.90 3.96 4.01 4.05 4.08 4.09
O
U 55 4.06 4.16 4.25 4.32 4.36 4.39
N
G 60 4.38 4.52 4.64 4.72 4.78
E
R 65 4.82 5.01 5.17 5.28
70 5.42 5.69 5.91
A
G 75 6.28 6.67
E
80 7.52
</TABLE>
Joint and Two-Thirds Survivor Life Annuity
Older Age
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 55 60 65 70 75 80
Y 50 4.09 4.23 4.38 4.55 4.74 4.93 5.13
O
U 55 4.40 4.58 4.78 5.00 5.22 5.45
N
G 60 4.81 5.05 5.31 5.58 5.86
E
R 65 5.37 5.70 6.04 6.38
70 6.16 6.59 7.04
A
G 75 7.27 7.87
E
80 8.86
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the Annuity 2000 Mortality Table.
17
<PAGE>
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
Number of Variable or Fixed Annuity for a Number of Variable or Fixed Annuity for a
Years Period Certain Years Period Certain
<S> <C> <C> <C>
1 84.65 16 6.76
2 43.05 17 6.47
3 29.19 18 6.20
4 22.27 19 5.97
5 18.12 20 5.75
6 15.35 21 5.56
7 13.38 22 5.39
8 11.90 23 5.24
9 10.75 24 5.09
10 9.83 25 4.96
11 9.09 26 4.84
12 8.46 27 4.73
13 7.94 28 4.63
14 7.49 29 4.53
15 7.10 30 4.45
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the Annuity 2000 Mortality Table
18
<PAGE>
GENERAL PROVISIONS
ENTIRE CONTRACT The entire contract consists of this certificate,
any application attached at issue and any
endorsements. All statements made by the Owner
shall be deemed representations and not warranties
and no such statements shall be used in any contest
unless it is contained in a written signed
application nor, if such statement was made by an
Owner unless a copy of the application containing
such statement is, or has been, furnished to such
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. 3027.
MISSTATEMENT OF AGE If the age of an individual is misstated, the
Company will adjust all benefits payable to that
which would be available at the correct age. Any
under payments already made by the Company will be
paid immediately. Any overpayments will be deducted
from future annuity benefits. Any overpayments or
underpayments will be charged or credited with
interest, as applicable, at a rate of 6%.
MODIFICATIONS Only the President, a Vice President or Secretary of
the Company may modify or waive any provisions of
this certificate. Agents or Brokers are not
authorized to do so. Modifications will be effected
by written endorsement signed by the appropriate
officer(s).
INCONTESTABILITY The Company cannot contest 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 Written
Request at any time after the certificate has been
issued. The request must be received at the
Principal Office at least one month before the new
Annuity Date. The new Annuity Date must be the
first of any month prior to the Maximum Alternative
Annuity Date shown on the Specifications page.
MINIMUMS All values, benefits or settlement options 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 compliance with applicable law and prior approval of
INVESTMENTS the Superintendent of Insurance, 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.
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
19
<PAGE>
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 certificate 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 that 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 the
Variable Sub-Account or any Sub-Accounts 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 subject to
CONSIDERATIONS 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.
20
<PAGE>
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefits Payable on the Annuity Date
Death Benefit Payable to Beneficiary if Owner Dies prior to Annuity Date
Non-Participating
21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
ENHANCED DEATH BENEFIT RIDER
This Rider is part of the certificate to which it is attached and is
effective on the Date of Issue of the certificate.
BENEFIT- The "Owner's Death Benefit" provision on page 12 of the certificate
is replaced by the following:
I. If an Owner dies before the Annuity Date and before the oldest
Owner's [90th] birthday, the death benefit will be the greater of:
(a) the Accumulated Value increased by any positive Market
Value Adjustment;
(b) gross payments reduced proportionately to reflect withdrawals (for
each withdrawal, the proportionate reduction is calculated as the
death benefit amount immediately prior to the withdrawal
multiplied by the withdrawal amount and divided by the Accumulated
Value immediately prior to the withdrawal); or
(c) The highest Accumulated Value on any prior contract anniversary as
determined after positive adjustments have been made for any
positive Market Value Adjustment and subsequent payments and
negative adjustments have been made for subsequent withdrawals.
II. If an Owner dies before the Annuity Date but after the oldest Owner's
[90th] birthday, the death benefit will be the greater of:
(a) the Accumulated Value increased by any positive Market Value
Adjustment or
(b) the death benefit, as calculated under Section I, that would have
been payable on the contract anniversary prior to the oldest
Owner's [90th] birthday, increased for subsequent payments and
reduced proportionately for subsequent withdrawals.
CHARGE - The Company will assess a monthly rider charge which will be deducted
Pro Rata on the last day of each month and on the date the Rider terminates.
The charge will be equal to the Accumulated Value on that date multiplied by
1/12th of the Enhanced Death Benefit Annual Percentage Rate shown on the
Specifications Page.
TERMINATION - This Rider will terminate on the earliest of the following:
-the Annuity Date;
-payment of the death benefit;
-surrender of the certificate; or
-receipt of the Owner's Written Request to terminate the Rider.
Signed for the Company at Dover, Delaware
/s/ Abigail M. Armstrong
President Secretary
<PAGE>
- ---------------
[LOGO] FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 LINCOLN STREET, WORCESTER, MA 01653
VARIABLE ANNUITY APPLICATION ALLMERICA SELECT CHARTER
- -------------------------------------------------------------------------------
1 MY INVESTMENT HOW MUCH I WANT TO INVEST.
- -------------------------------------------------------------------------------
I am investing $________________ in Allmerica Select.
(Minimum $25,000. Make check payable to Allmerica Financial.)
If IRA, Roth, or SEP-IRA application, this payment is a (check one):
/ / Rollover/Conversion / / Trustee to Trustee Transfer
/ / Regular, Roth, or SEP-IRA Payment for Tax Year _________
- -------------------------------------------------------------------------------
2 WHERE WHERE I WANT MY MONEY INVESTED.
- -------------------------------------------------------------------------------
Select your investment portfolio by allocating your dollars among the
accounts by percent or select one of the Model Portfolios below. Use whole
percentages.
_____ % Select Emerging Mkts. _____ % Select Gr. & Inc.
_____ % Select Int'l Equity _____ % Fidelity VIP Eq. Inc.
_____ % T. Rowe Price Int'l _____ % Fidelity VIP High Inc.
_____ % Select Aggr. Growth _____ % Select Income
_____ % Select Capital Appr. _____ % Allmerica Money Mkt.
_____ % Select Value Opp. _____ % Fixed Acct (Rate
_____ % Select Growth Guar. for 1 Yr from
_____ % Select Strategic Gr. date of payment)
_____ % Fidelity VIP Growth
Guarantee Period Accounts ($1,000 minimum per Account)
____ % 3 Year ____ % 6 Year ____ % 8 Year
____ % 5 Year ____ % 7 Year ____ % 9 Year ____ % 10 Year
MODEL PORTFOLIOS
/ / Accumulator / / Builder / / Provider / / Saver / / Preserver
TOTAL OF ALL ALLOCATIONS MUST EQUAL 100%. FUTURE INVESTMENTS WILL BE
ALLOCATED TO THIS SELECTION UNLESS CHANGED BY ME.
- -------------------------------------------------------------------------------
3 ACCOUNT REBALANCING
- -------------------------------------------------------------------------------
/ / I elect Automatic Account Rebalancing of the variable accounts to the
allocations specified in Section 2.
/ / Monthly / / Quarterly / / Semi-Annually / / Annually
(Automatic Account Rebalancing and Dollar Cost Averaging cannot be in effect
simultaneously.)
- -------------------------------------------------------------------------------
4 DOLLAR COST AVERAGING
- -------------------------------------------------------------------------------
Select ONE account from which to transfer money.
Be sure you have allocated money to this account in Section 2.
Transfer $____________ ($100 Minimum)
FROM / / Fixed Account OR / / Select Income* OR / / Money Market*
(*This account cannot be selected in the allocation below.)
EVERY / / Month / / Quarter / / 6 Mos. / / 12 Mos.
INTO:
_____ % Select Emerging Mkts. _____ % Select Strategic Gr.
_____ % Select Int'l Equity _____ % Fidelity VIP Growth
_____ % T. Rowe Price Int'l _____ % Select Gr. & Inc.
_____ % Select Aggr. Growth _____ % Fidelity VIP Eq. Inc.
_____ % Select Capital Appr. _____ % Fidelity VIP High Inc.
_____ % Select Value Opp. _____ % Select Income
_____ % Select Growth _____ % Allmerica Money Mkt.
100 % TOTAL
- -------------------------------------------------------------------------------
5 THE OWNER PLEASE PRINT CLEARLY
- -------------------------------------------------------------------------------
If joint owners, one must be the annuitant.
_______________________________________________________________________________
Owner's First Name Middle Last
_______________________________________________________________________________
Joint Owner's First Name Middle Last
_______________________________________________________________________________
Street Address
_______________________________________________________________________________
City State Zip
( )
_______________________________________________________________________________
Daytime Phone Number
- - / / / / M / / F
_______________________________________________________________________________
Owner's Social Security Number Date of Birth Sex
- - / / / / M / / F
_______________________________________________________________________________
Joint Owner's Social Security Number Date of Birth Sex
- -------------------------------------------------------------------------------
6 THE ANNUITANT PLEASE PRINT CLEARLY
- -------------------------------------------------------------------------------
Complete this section if the annuitant is someone other than the owner, OR if
joint owners were entered in Section 5.
_______________________________________________________________________________
Annuitant's First Name Middle Last
_______________________________________________________________________________
Joint Annuitant's First Name Middle Last
_______________________________________________________________________________
Street Address
_______________________________________________________________________________
City State Zip
( )
_______________________________________________________________________________
Daytime Phone Number
- - / / / / M / / F
_______________________________________________________________________________
Annuitant's Social Security Number Date of Birth Sex
- - / / / / M / / F
_______________________________________________________________________________
Joint Annuitant's Social Security Number Date of Birth Sex
- -------------------------------------------------------------------------------
7 BENEFICIARY PLEASE PRINT CLEARLY
- -------------------------------------------------------------------------------
If joint owners, the survivor is primary beneficiary unless otherwise
indicated below.
_______________________________________________________________________________
Name of Primary Beneficiary Relationship to Owner
_______________________________________________________________________________
Name of Contingent Beneficiary Relationship to Owner
- -------------------------------------------------------------------------------
8 OPTIONAL RIDER
- -------------------------------------------------------------------------------
I elect:
/ / Enhanced Death Benefit Rider
/ / ___________________________________________________________________________
- -------------------------------------------------------------------------------
9 TYPE OF ACCOUNT TO BE ISSUED
- -------------------------------------------------------------------------------
9a / / NON-QUALIFIED, OR
9b / / TAX-QUALIFIED PLAN
(Check ONLY one.)
/ / Regular IRA / / Roth IRA / / 401(k) Rollover*
/ / Employer-established SEP-IRA*
/ / Pension/Profit Sharing (401(a))*
/ / Tax-Sheltered Annuity Plan (Section 403(b))*
*Attach required additional forms.
- -------------------------------------------------------------------------------
10 REPLACEMENT
- -------------------------------------------------------------------------------
Will the proposed certificate replace any existing annuity or life insurance
policy? / / Yes / / No
(If yes, list company name and policy number.)
_______________________________________________________________________________
- -------------------------------------------------------------------------------
11 SIGNATURES
- -------------------------------------------------------------------------------
I/We represent to the best of my/our knowledge and belief that the statements
made in this application are true and complete. I/We agree to all terms and
conditions as shown on the front and back. It is indicated and agreed that
the only statements which are to be construed as the basis of the certificate
are those contained in this application. I/We acknowledge receipt of a
current prospectus describing the certificate applied for. If IRA, Roth, or
SEP-IRA application, I/we have received a Disclosure Buyer's Guide. I/WE
UNDERSTAND THAT ALL PAYMENTS AND VALUES BASED ON THE VARIABLE ACCOUNTS MAY
FLUCTUATE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNT; AND ALL PAYMENTS AND
VALUES BASED ON THE GUARANTEE PERIOD ACCOUNTS ARE SUBJECT TO A MARKET VALUE
ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN EITHER AN UPWARD OR
DOWNWARD ADJUSTMENT.
/ / Please send me a Statement of Additional Information (SAI).
_______________________________________________________________________________
Signed at City State Date
X
_______________________________________________________________________________
Signature of Owner
X
_______________________________________________________________________________
Signature of Joint Owner
- -------------------------------------------------------------------------------
FOR REGISTERED REP USE ONLY
- -------------------------------------------------------------------------------
Does the certificate applied for replace an existing annuity or life
insurance policy?
/ / Yes / / No
If yes, attach replacement forms as required.
As Registered Representative, I certify witnessing the signature of the
applicant and that the information in this application has been accurately
recorded, to the best of my knowledge and belief. Based on the information
furnished by the Owner(s) in this application, I certify that I have
reasonable grounds for believing the purchase of the certificate applied for
is suitable for the Owner(s). I further certify that the Prospectuses were
delivered and that no written sales materials other than those furnished or
approved by the Company were used.
X
_______________________________________________________________________________
Signature of Registered Representative
_______________________________________________________________________________
Print Name of Registered Representative
_______________________________________________________________________________
Telephone Registered Rep #
_______________________________________________________________________________
E-Mail Address TR Code
_______________________________________________________________________________
Name of Broker/Dealer Branch #
_______________________________________________________________________________
Branch Office Street Address for Certificate Delivery
_______________________________________________________________________________
City State Zip
Remarks:_______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
- -------------------------------------------------------------------------------
FOR HOME OFFICE USE ONLY
- -------------------------------------------------------------------------------
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE>
November 17, 1998
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: ALLMERICA SELECT SEPARATE ACCOUNT OF FIRST
ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
File #'s: 333-63087 and 811-8116
Gentlemen:
In my capacity as Attorney of First Allmerica Financial Life Insurance
Company (the "Company"), I have participated in the preparation of the
Pre-Effective Amendment to the Registration Statement for Allmerica Select
Separate Account 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. Allmerica Select Separate Account 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 Allmerica Select Separate Account 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 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 to the Registration Statement for Allmerica Select
Separate Account on Form N-4 under the Securities Act of 1933 and amendment
under the Investment Company Act of 1940.
Very truly yours,
/s/ Lynn Gelinas
Lynn Gelinas
Attorney
<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 Allmerica Select Separate Account of First Allmerica Financial
Life Insurance Company on Form N-4 of our report dated February 3, 1998,
relating to the financial statements of First Allmerica Financial Life
Insurance Company, and our report dated March 25, 1998, relating to the
financial statements of Allmerica Select Separate Account 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 4, 1998
