<PAGE>
Registration No. 33-82658
811-08704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Post-Effective Amendment No. 10
GROUP VEL ACCOUNT
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester MA 01653
(Address of Principal Executive Office)
Abigail M. Armstrong, Esq.
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)
-----
X on December 15, 1998 pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a) (1)
-----
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.
FLEXIBLE PREMIUM VARIABLE LIFE
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940
("1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("1933 Act").
The 24f-2 Notice for the issuer's fiscal year ended December 31, 1997 was
filed on or about March 30, 1998.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS A
- ----------- -----------------------
<S> <C>
1 . . . . . . . . . . . . . . . . .Cover Page
2 . . . . . . . . . . . . . . . . .Cover Page
3 . . . . . . . . . . . . . . . . .Not Applicable
4 . . . . . . . . . . . . . . . . .Distribution
5 . . . . . . . . . . . . . . . . .The Company, The Group VEL Account
6 . . . . . . . . . . . . . . . . .The Group VEL Account
7 . . . . . . . . . . . . . . . . .Not Applicable
8 . . . . . . . . . . . . . . . . .Not Applicable
9 . . . . . . . . . . . . . . . . .Legal Proceedings
10. . . . . . . . . . . . . . . . .Summary; Description of the Company, The Group VEL Account and
the Underlying Funds; The Certificate; Certificate Termination and
Reinstatement; Other Certificate Provisions
11. . . . . . . . . . . . . . . . .Summary; The Trust, Investment Objectives and Policies
12. . . . . . . . . . . . . . . . .Summary; The Trust
13. . . . . . . . . . . . . . . . .Summary; The Trust; VIP; VIP II; T. Rowe Price; DGPF; INVESCO VIF; and
Morgan Stanley; Investment Advisory Services to the Trust; Investment Advisory
Services to VIP; Investment Advisory Services to VIP II; Investment
Advisory Services to T. Rowe Price; Investment Advisory Services to
DGPF; Investment Advisory Services to INVESCO VIF; and Investment Advisory
Services to Morgan Stanley; Charges and Deductions
14. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate
15. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate; Premium Payments;
Allocation of Net Premiums
16. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; VIP; VIP II; T. Rowe Price; DGPF;
INVESCO VIF; and Morgan Stanley; Premium Payments; Allocation of Net Premiums
17. . . . . . . . . . . . . . . . .Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; VIP; VIP II; T. Rowe Price; DGPF;
INVESCO VIF; and Morgan Stanley; Premium Payments
19. . . . . . . . . . . . . . . . .Reports; Voting Rights
20. . . . . . . . . . . . . . . . .Not Applicable
21. . . . . . . . . . . . . . . . .Summary; Certificate Loans; Other Certificate Provisions
22. . . . . . . . . . . . . . . . .Other Certificate Provisions
23. . . . . . . . . . . . . . . . .Not Required
24. . . . . . . . . . . . . . . . .Other Certificate Provisions
25. . . . . . . . . . . . . . . . .The Company
26. . . . . . . . . . . . . . . . .Not Applicable
27. . . . . . . . . . . . . . . . .The Company
28. . . . . . . . . . . . . . . . .Directors and Principal Officers of the Company
29. . . . . . . . . . . . . . . . .The Company
30. . . . . . . . . . . . . . . . .Not Applicable
31. . . . . . . . . . . . . . . . .Not Applicable
32. . . . . . . . . . . . . . . . .Not Applicable
33. . . . . . . . . . . . . . . . .Not Applicable
<PAGE>
34. . . . . . . . . . . . . . . . .Not Applicable
35. . . . . . . . . . . . . . . . .Distribution
36. . . . . . . . . . . . . . . . .Not Applicable
37. . . . . . . . . . . . . . . . .Not Applicable
38. . . . . . . . . . . . . . . . .Summary; Distribution
39. . . . . . . . . . . . . . . . .Summary; Distribution
40. . . . . . . . . . . . . . . . .Not Applicable
41. . . . . . . . . . . . . . . . .The Company, Distribution
42. . . . . . . . . . . . . . . . .Not Applicable
43. . . . . . . . . . . . . . . . .Not Applicable
44. . . . . . . . . . . . . . . . .Premium Payments; Certificate Value and Surrender Value
45. . . . . . . . . . . . . . . . .Not Applicable
46. . . . . . . . . . . . . . . . .Certificate Value and Surrender Value; Federal Tax Considerations
47. . . . . . . . . . . . . . . . .The Company
48. . . . . . . . . . . . . . . . .Not Applicable
49. . . . . . . . . . . . . . . . .Not Applicable
50. . . . . . . . . . . . . . . . .The Group VEL Account
51. . . . . . . . . . . . . . . . .Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate
Provisions
52. . . . . . . . . . . . . . . . .Addition, Deletion or Substitution of Investments
53. . . . . . . . . . . . . . . . .Federal Tax Considerations
54. . . . . . . . . . . . . . . . .Not Applicable
55. . . . . . . . . . . . . . . . .Not Applicable
56. . . . . . . . . . . . . . . . .Not Applicable
57. . . . . . . . . . . . . . . . .Not Applicable
58. . . . . . . . . . . . . . . . .Not Applicable
59. . . . . . . . . . . . . . . . .Not Applicable
</TABLE>
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS B
- ----------- -----------------------
<S> <C>
1 . . . . . . . . . . . . . . . . .Cover Page
2 . . . . . . . . . . . . . . . . .Cover Page
3 . . . . . . . . . . . . . . . . .Not Applicable
4 . . . . . . . . . . . . . . . . .Distribution
5 . . . . . . . . . . . . . . . . .The Company, The Group VEL Account
6 . . . . . . . . . . . . . . . . .The Group VEL Account
7 . . . . . . . . . . . . . . . . .Not Applicable
8 . . . . . . . . . . . . . . . . .Not Applicable
9 . . . . . . . . . . . . . . . . .Legal Proceedings
10. . . . . . . . . . . . . . . . .Summary; Description of the Company, The Group VEL Account and the Underlying Funds; The
Certificate; Certificate Termination and Reinstatement; Other Certificate Provisions
11. . . . . . . . . . . . . . . . .Summary; The Trust, Investment Objectives and Policies
12. . . . . . . . . . . . . . . . .Summary; The Trust
13. . . . . . . . . . . . . . . . .Summary; The Trust; MFVAT; DGPF; and T. Rowe Price; Investment
Advisory Services to the Trust; Investment Advisory Services to MFVAT; Investment
Advisory Services to DGPF; and Investment Advisory Services to T. Rowe Price;
Charges and Deductions
14. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate
15. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate; Premium Payments;
Allocation of Net Premiums
16. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; MFVAT; DGPF; and T. Rowe Price; Premium Payments;
Allocation of Net Premiums
17. . . . . . . . . . . . . . . . .Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; MFVAT; DGPF; and T. Rowe Price;
Premium Payments
19. . . . . . . . . . . . . . . . .Reports; Voting Rights
20. . . . . . . . . . . . . . . . .Not Applicable
21. . . . . . . . . . . . . . . . .Summary; Certificate Loans; Other Certificate Provisions
22. . . . . . . . . . . . . . . . .Other Certificate Provisions
23. . . . . . . . . . . . . . . . .Not Required
24. . . . . . . . . . . . . . . . .Other Certificate Provisions
25. . . . . . . . . . . . . . . . .The Company
26. . . . . . . . . . . . . . . . .Not Applicable
27. . . . . . . . . . . . . . . . .The Company
28. . . . . . . . . . . . . . . . .Directors and Principal Officers of the Company
29. . . . . . . . . . . . . . . . .The Company
30. . . . . . . . . . . . . . . . .Not Applicable
31. . . . . . . . . . . . . . . . .Not Applicable
32. . . . . . . . . . . . . . . . .Not Applicable
33. . . . . . . . . . . . . . . . .Not Applicable
34. . . . . . . . . . . . . . . . .Not Applicable
35. . . . . . . . . . . . . . . . .Distribution
36. . . . . . . . . . . . . . . . .Not Applicable
<PAGE>
37. . . . . . . . . . . . . . . . .Not Applicable
38. . . . . . . . . . . . . . . . .Summary; Distribution
39. . . . . . . . . . . . . . . . .Summary; Distribution
40. . . . . . . . . . . . . . . . .Not Applicable
41. . . . . . . . . . . . . . . . .The Company, Distribution
42. . . . . . . . . . . . . . . . .Not Applicable
43. . . . . . . . . . . . . . . . .Not Applicable
44. . . . . . . . . . . . . . . . .Premium Payments; Certificate Value and Surrender Value
45. . . . . . . . . . . . . . . . .Not Applicable
46. . . . . . . . . . . . . . . . .Certificate Value and Surrender Value; Federal Tax Considerations
47. . . . . . . . . . . . . . . . .The Company
48. . . . . . . . . . . . . . . . .Not Applicable
49. . . . . . . . . . . . . . . . .Not Applicable
50. . . . . . . . . . . . . . . . .The Group VEL Account
51. . . . . . . . . . . . . . . . .Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate Provisions
52. . . . . . . . . . . . . . . . .Addition, Deletion or Substitution of Investments
53. . . . . . . . . . . . . . . . .Federal Tax Considerations
54. . . . . . . . . . . . . . . . .Not Applicable
55. . . . . . . . . . . . . . . . .Not Applicable
56. . . . . . . . . . . . . . . . .Not Applicable
57. . . . . . . . . . . . . . . . .Not Applicable
58. . . . . . . . . . . . . . . . .Not Applicable
59. . . . . . . . . . . . . . . . .Not Applicable
</TABLE>
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8b-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS C
- ----------- -----------------------
<S> <C>
1 . . . . . . . . . . . . . . . . .Cover Page
2 . . . . . . . . . . . . . . . . .Cover Page
3 . . . . . . . . . . . . . . . . .Not Applicable
4 . . . . . . . . . . . . . . . . .Distribution
5 . . . . . . . . . . . . . . . . .The Company, The Group VEL Account
6 . . . . . . . . . . . . . . . . .The Group VEL Account
7 . . . . . . . . . . . . . . . . .Not Applicable
8 . . . . . . . . . . . . . . . . .Not Applicable
9 . . . . . . . . . . . . . . . . .Legal Proceedings
10. . . . . . . . . . . . . . . . .Summary; Description of the Company, The Group VEL Account and the Underlying Funds; The
Certificate; Certificate Termination and Reinstatement; Other Certificate Provisions
11. . . . . . . . . . . . . . . . .Summary; DGPF; Investment Objectives and Policies
12. . . . . . . . . . . . . . . . .Summary; DGPF
13. . . . . . . . . . . . . . . . .Summary; DGPF and the Trust; Investment Advisory Services
Charges and Deductions
14. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate
15. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate; Premium Payments;
Allocation of Net Premiums
16. . . . . . . . . . . . . . . . .The Group VEL Account; DGPF and the Trust; Premium Payments; Allocation of Net Premiums
17. . . . . . . . . . . . . . . . .Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18. . . . . . . . . . . . . . . . .The Group VEL Account; DGPF and the Trust; Premium Payments
19. . . . . . . . . . . . . . . . .Reports; Voting Rights
20. . . . . . . . . . . . . . . . .Not Applicable
21. . . . . . . . . . . . . . . . .Summary; Certificate Loans; Other Certificate Provisions
22. . . . . . . . . . . . . . . . .Other Certificate Provisions
23. . . . . . . . . . . . . . . . .Not Required
24. . . . . . . . . . . . . . . . .Other Certificate Provisions
25. . . . . . . . . . . . . . . . .The Company
26. . . . . . . . . . . . . . . . .Not Applicable
27. . . . . . . . . . . . . . . . .The Company
28. . . . . . . . . . . . . . . . .Directors and Principal Officers of the Company
29. . . . . . . . . . . . . . . . .The Company
30. . . . . . . . . . . . . . . . .Not Applicable
31. . . . . . . . . . . . . . . . .Not Applicable
32. . . . . . . . . . . . . . . . .Not Applicable
33. . . . . . . . . . . . . . . . .Not Applicable
34. . . . . . . . . . . . . . . . .Not Applicable
35. . . . . . . . . . . . . . . . .Distribution
36. . . . . . . . . . . . . . . . .Not Applicable
37. . . . . . . . . . . . . . . . .Not Applicable
38. . . . . . . . . . . . . . . . .Summary; Distribution
39. . . . . . . . . . . . . . . . .Summary; Distribution
<PAGE>
40. . . . . . . . . . . . . . . . .Not Applicable
41. . . . . . . . . . . . . . . . .The Company, Distribution
42. . . . . . . . . . . . . . . . .Not Applicable
43. . . . . . . . . . . . . . . . .Not Applicable
44. . . . . . . . . . . . . . . . .Premium Payments; Certificate Value and Surrender Value
45. . . . . . . . . . . . . . . . .Not Applicable
46. . . . . . . . . . . . . . . . .Certificate Value and Surrender Value; Federal Tax Considerations
47. . . . . . . . . . . . . . . . .The Company
48. . . . . . . . . . . . . . . . .Not Applicable
49. . . . . . . . . . . . . . . . .Not Applicable
50. . . . . . . . . . . . . . . . .The Group VEL Account
51. . . . . . . . . . . . . . . . .Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate Provisions
52. . . . . . . . . . . . . . . . .Addition, Deletion or Substitution of Investments
53. . . . . . . . . . . . . . . . .Federal Tax Considerations
54. . . . . . . . . . . . . . . . .Not Applicable
55. . . . . . . . . . . . . . . . .Not Applicable
56. . . . . . . . . . . . . . . . .Not Applicable
57. . . . . . . . . . . . . . . . .Not Applicable
58. . . . . . . . . . . . . . . . .Not Applicable
59. . . . . . . . . . . . . . . . .Not Applicable
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SUPPLEMENT
TO PROSPECTUSES DATED MAY 1, 1998
VEL Account VEL II Account Group VEL Account Inheiritage Account (Variable)
The management fee table under the section Investment Advisory Services To The
Trust is amended to change the management fee structure for the Select Growth
Fund as follows:
<TABLE>
<S> <C>
First $250 Million.......... 0.85%
Next $250 Million........... 0.80%
Next $250 Million........... 0.75%
Over $750 Million........... 0.70%
</TABLE>
* * *
AMENDMENT TO DIRECTORS AND OFFICERS
Effective May 8, 1998, Robert P. Restrepo, Jr. has joined First Allmerica
Financial Life Insurance Company as a Director and Vice President. Mr. Restrepo
most recently served as Chief Executive Officer, Personal Lines, for Travelers
Property & Casualty Group, Hartford, Connecticut from 1996 till May, 1998. He
also previously served at Aetna Life & Casualty Company, Hartford, Connecticut
for over 25 years, most recently as Senior Vice President, Personal Lines,
1994-1996; Senior Vice President, Homeowner's Insurance, 1993-1994; and Vice
President, Sales 1991-1993. Mr. Restrepo is also a Director of Allmerica
Financial Life Insurance and Annuity Company.
Dated: June 1, 1998
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
----------------------------------------------- ------- ------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums................................... $ -- $ 7.0 $ 0.4 $ 23.3
Universal life and investment product
policy fees.............................. 67.7 55.0 195.7 156.4
Net investment income...................... 38.7 41.5 113.5 125.8
Net realized investment gains (losses)..... (2.7) 0.2 19.5 (2.9)
Other income............................... 0.4 0.2 0.3 0.6
------- ------- --------- ---------
Total revenues......................... 104.1 103.9 329.4 303.2
------- ------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 32.7 48.9 114.5 147.2
Policy acquisition expenses................ 13.3 11.3 45.0 38.0
Sales practice litigation expense.......... 21.0 -- 21.0 --
Loss from cession of disability income
business................................. -- -- -- 53.9
Other operating expenses................... 22.6 24.0 72.5 71.6
------- ------- --------- ---------
Total benefits, losses and expenses.... 89.6 84.2 253.0 310.7
------- ------- --------- ---------
Income (loss) before federal income
taxes.................................... 14.5 19.7 76.4 (7.5)
------- ------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 1.5 14.6 19.0 5.9
Deferred................................... 1.7 (7.6) 5.9 (8.1)
------- ------- --------- ---------
Total federal income tax expense
(benefit)............................ 3.2 7.0 24.9 (2.2)
------- ------- --------- ---------
Net income (loss).............................. 11.3 12.7 51.5 (5.3)
OTHER COMPREHENSIVE (LOSS) INCOME
Net (depreciation) appreciation on available
for sale securities........................... (9.8) 13.1 (18.9) 21.7
Benefit (provision) for deferred federal income
taxes......................................... 3.4 (4.6) 6.6 (7.6)
------- ------- --------- ---------
Other comprehensive (loss) income...... (6.4) 8.5 (12.3) 14.1
------- ------- --------- ---------
Comprehensive income (loss) $ 4.9 $ 21.2 $ 39.2 $ 8.8
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 1998 1997
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period..... $ 2.5 $ 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 386.9 346.3
Issuance of common stock................... 8.0 --
--------- ---------
Balance at end of period................... 394.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4
Net income (loss).......................... 51.5 (5.3)
--------- ---------
Balance at end of period................... 264.6 171.1
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 38.5 20.5
Net (depreciation) appreciation on
available for sale securities............ (18.9) 21.7
Benefit (provision) for deferred federal
income taxes............................. 6.6 (7.6)
--------- ---------
Other comprehensive (loss) income...... (12.3) 14.1
--------- ---------
Balance at end of period................... 26.2 34.6
--------- ---------
Total shareholder's equity............. $ 688.2 $ 554.5
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER DECEMBER
30, 31,
(IN MILLIONS) 1998 1997
----------------------------------------------- ----------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized
cost of $1,266.5 and $1,340.5)............ $ 1,334.2 $ 1,402.5
Equity securities at fair value (cost of
$37.5 and $34.4).......................... 34.5 54.0
Mortgage loans............................. 227.1 228.2
Real estate................................ 3.9 12.0
Policy loans............................... 151.0 140.1
Other long term investments................ 19.5 20.3
----------- ----------
Total investments...................... 1,770.2 1,857.1
----------- ----------
Cash and cash equivalents.................... 137.1 31.1
Accrued investment income.................... 31.3 34.2
Deferred policy acquisition costs............ 903.3 765.3
Reinsurance receivables:
Future policy benefits..................... 265.4 242.5
Outstanding claims, losses and loss
adjustment expenses....................... 12.7 5.5
Unearned premiums.......................... 2.8 1.7
Other...................................... 31.5 1.4
----------- ----------
Total reinsurance receivables.......... 312.4 251.1
----------- ----------
Other assets................................. 36.0 10.7
Separate account assets 9,072.1 7,567.3
----------- ----------
Total assets........................... $ 12,262.4 $ 10,516.8
----------- ----------
----------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits..................... $ 2,241.0 $ 2,097.3
Outstanding claims, losses and loss
adjustment expenses....................... 18.8 18.5
Unearned premiums.......................... 2.8 1.8
Contractholder deposit funds and other
policy liabilities........................ 41.6 32.5
----------- ----------
Total policy liabilities and
accruals............................... 2,304.2 2,150.1
----------- ----------
Expenses and taxes payable................... 84.8 77.6
Reinsurance premiums payable................. 36.4 4.9
Short term debt.............................. -- --
Deferred federal income taxes................ 75.2 75.9
Separate account liabilities................. 9,073.6 7,567.3
----------- ----------
Total liabilities...................... 11,574.2 9,875.8
----------- ----------
Commitments and contingencies (Note 5)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,522 shares issued &
outstanding................................ 2.5 2.5
Additional paid in capital................... 394.9 386.9
Accumulated other comprehensive income....... 26.2 38.5
Retained earnings............................ 264.6 213.1
----------- ----------
Total shareholder's equity............. 688.2 641.0
----------- ----------
Total liabilities and shareholder's
equity................................. $ 12,262.4 $ 10,516.8
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 1998 1997
----------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 51.5 $ (5.3)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Net realized (gains) losses............ (19.5) 2.9
Net amortization and depreciation...... (5.9) 0.2
Sales practice litigation expense...... 21.0
Deferred federal income taxes.......... 5.9 (8.1)
Change in deferred acquisition costs... (140.1) (58.7)
Change in premiums and notes
receivable, net of reinsurance....... 31.3 --
Change in accrued investment income.... 2.9 (2.9)
Change in policy liabilities and
accruals, net........................ 154.2 (20.8)
Change in reinsurance receivable....... (61.3) (2.6)
Change in expenses and taxes payable... (3.5) (29.6)
Separate account activity, net......... 1.6 0.4
Other, net............................. (25.4) 0.4
----------- -----------
Net cash provided by (used in)
operating activities............. 12.7 (59.1)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities...... 145.9 602.2
Proceeds from disposals of equity
securities............................... 42.1 2.1
Proceeds from disposals of other
investments.............................. 12.5 19.4
Proceeds from mortgages matured or
collected................................ 55.3 40.5
Purchase of available-for-sale fixed
maturities............................... (77.6) (562.6)
Purchase of equity securities.............. (29.4) (1.9)
Purchase of other investments.............. (62.7) (41.1)
Other, net................................. (.7) --
----------- -----------
Net cash provided by investing
activities....................... 85.4 58.6
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common
stock.................................... 8.0 --
----------- -----------
Net cash provided by financing
activities....................... 8.0 --
----------- -----------
Net change in cash and cash equivalents........ 106.0 (0.5)
Cash and cash equivalents, beginning of
period........................................ 31.1 18.8
----------- -----------
Cash and cash equivalents, end of period....... $ 137.1 $ 18.3
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC"). The accompanying
unaudited consolidated financial statements of AFLIAC have been prepared in
accordance with generally accepted accounting principles for stock life
insurance companies for interim financial information.
The interim consolidated financial statements of AFLIAC include the accounts of
Somerset Square, Inc., a wholly owned non-insurance company. Somerset Square,
Inc. was transferred from SMAFCO effective November 30, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments, consisting of only normal
and recurring adjustments, necessary for a fair presentation of the financial
position and results of operations. Certain reclassifications have been made to
the 1997 consolidated statements of income in order to conform to the 1998
presentation. The results of operations for the third quarter and nine months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year. These financial statements should be read in
conjunction with the Company's 1997 Annual Audited Financial Statements.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted Statement No. 130 for the first quarter of 1998, resulting primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP No. 97-3"). SoP No. 97-3
provides guidance on when a liability should be recognized for guaranty fund and
other assessments and how to measure the liability. This statement allows for
the discounting of the liability if the amount and timing of the cash payments
are fixed and determinable. In addition, it provides criteria for when an asset
may be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use"
UF-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
("SoP No. 98-1"). SoP No. 98-1 requires that certain costs incurred in
developing internal-use computer software be capitalized and provides guidance
for determining whether computer software is to be considered for internal use.
This statement is effective for fiscal years beginning after December 15, 1998.
In the second quarter, the Company adopted SoP No. 98-1 effective January 1,
1998. The adoption of SoP No. 98-1 did not have a material effect on the results
of operations or financial position for the three months ended March 31, 1998.
Through the nine months ended September 30, 1998, the adoption of this SoP
resulted in an increase to pre-tax income of approximately $6.0 million.
3. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. This agreement did not have a
material effect on the Company's results of operations or financial position.
4. FEDERAL INCOME TAXES
Federal income tax expense for the periods ended September 30, 1998 and 1997,
has been computed using estimated effective tax rates. These rates are revised,
if necessary, at the end of each successive interim period to reflect the
current estimates of the annual effective tax rates.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 refiled the action in
Federal District Court in Worcester, Massachusetts. The Company and the
plaintiffs have entered into a settlement agreement which they will present to
the court for approval. Although the Company believes it has meritorious
defenses to plaintiffs' claims, it concluded that this settlement was best for
the Company. Accordingly, AFC recognized a $31.0 million pre-tax expense during
the third quarter of 1998 related to this litigation, of which $21.0 million was
apportioned to AFLIAC. 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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
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.
UF-6
<PAGE>
BALANCE SHEET
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $2,266,663 $15,374,014 $ 471,447 $24,213,382 $ 27,641 $ 622,421
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 91 133 -- -- --
---------- ------------ ------------ ------------ ---------- ----------
Total assets.............................. 2,266,663 15,374,105 471,580 24,213,382 27,641 622,421
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 12 -- -- 131 3 --
---------- ------------ ------------ ------------ ---------- ----------
Net assets................................ $2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
---------- ------------ ------------ ------------ ---------- ----------
---------- ------------ ------------ ------------ ---------- ----------
Net asset distribution by category:
Variable life policies.................... $2,266,651 $15,373,834 $ 471,580 $24,213,251 $ 27,638 $ 622,421
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- 271 -- -- -- --
---------- ------------ ------------ ------------ ---------- ----------
$2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
---------- ------------ ------------ ------------ ---------- ----------
Units outstanding........................... 1,283,086 11,359,499 394,674 11,682,115 21,431 395,456
Net asset value per unit.................... $ 1.766562 $ 1.353414 $1.194860 $ 2.072677 $1.289650 $1.573932
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $8,819,867 $ 191,017 $ 483,804 $7,786,135
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 12
------------- ---------- ------------ -------------
Total assets.............................. 8,819,867 191,017 483,804 7,786,147
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 68 1 3 --
------------- ---------- ------------ -------------
Net assets................................ $8,819,799 $ 191,016 $ 483,801 $7,786,147
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
Net asset distribution by category:
Variable life policies.................... $8,819,799 $ 191,016 $ 483,801 $7,786,147
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
------------- ---------- ------------ -------------
$8,819,799 $ 191,016 $ 483,801 $7,786,147
------------- ---------- ------------ -------------
Units outstanding........................... 4,220,377 109,264 294,851 5,536,528
Net asset value per unit.................... $ 2.089813 $1.748206 $1.640835 $ 1.406323
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
BALANCE SHEET
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ 190,605 $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- 56,940 127,409 586,624 48,782 579,716
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 5 -- --
------------ ----------- ------------- ---------- ---------- -------------
Total assets.............................. 190,605 56,940 127,409 586,629 48,782 579,716
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
------------ ----------- ------------- ---------- ---------- -------------
Net assets................................ $ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
------------ ----------- ------------- ---------- ---------- -------------
------------ ----------- ------------- ---------- ---------- -------------
Net asset distribution by category:
Variable life policies.................... $ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- -- -- --
------------ ----------- ------------- ---------- ---------- -------------
$ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
------------ ----------- ------------- ---------- ---------- -------------
------------ ----------- ------------- ---------- ---------- -------------
Units outstanding........................... 123,614 41,971 75,014 296,384 37,623 365,683
Net asset value per unit.................... $1.541942 $1.356639 $1.698480 $ 1.979291 $ 1.296617 $1.585297
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL STOCK INTERNATIONAL EQUITY INDUSTRIAL INCOME TOTAL RETURN
---------------------- -------------------- ----------------- ------------
<S> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. 313,080 -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- 4,124,898 -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- 8,260 56,271
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 7 -- --
---------- ----------- ----------------- ------------
Total assets.............................. 313,080 4,124,905 8,260 56,271
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 1 -- -- --
---------- ----------- ----------------- ------------
Net assets................................ $ 313,079 $4,124,905 $ 8,260 $ 56,271
---------- ----------- ----------------- ------------
---------- ----------- ----------------- ------------
Net asset distribution by category:
Variable life policies.................... $ 313,079 $4,124,905 $ 8,260 $ 56,271
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
---------- ----------- ----------------- ------------
$ 313,079 $4,124,905 $ 8,260 $ 56,271
---------- ----------- ----------------- ------------
---------- ----------- ----------------- ------------
Units outstanding........................... 277,770 3,667,589 5,811 42,974
Net asset value per unit.................... $1.127115 $ 1.124691 $1.421423 $1.309412
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. --
Investment in shares of T. Rowe Price
International Series, Inc................. --
Investment in shares of Delaware Group
Premium Fund, Inc......................... --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... 10,044,137
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 58
--------------
Total assets.............................. 10,044,195
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... --
--------------
Net assets................................ $10,044,195
--------------
--------------
Net asset distribution by category:
Variable life policies.................... $10,044,195
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... --
--------------
$10,044,195
--------------
--------------
Units outstanding........................... 9,366,395
Net asset value per unit.................... $ 1.072365
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
OPS
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
---------- ------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 17,907 $659,374 $216,882 $224,452 $ 604 $ --
EXPENSES:
Mortality and expense risk fees........... 9,160 67,682 20,985 85,929 70 2,921
---------- ------------ ------------ ------------ ---------- -----------
Net investment income..................... 8,747 591,692 195,897 138,523 534 (2,921)
---------- ------------ ------------ ------------ ---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 21,129 -- -- 40,412 -- --
Net realized gain from sales of
investments............................. (3,863) 13,484 -- 270,900 857 9,933
---------- ------------ ------------ ------------ ---------- -----------
Net realized gain....................... 17,266 13,484 -- 311,312 857 9,933
Net unrealized gain (loss)................ (145,250) 360,476 -- 183,657 507 (119,618)
---------- ------------ ------------ ------------ ---------- -----------
Net realized and unrealized gain
(loss)................................ (127,984) 373,960 -- 494,969 1,364 (109,685)
---------- ------------ ------------ ------------ ---------- -----------
Net increase in net assets from
operations............................ $(119,237) $965,652 $195,897 $633,492 $1,898 $(112,606)
---------- ------------ ------------ ------------ ---------- -----------
---------- ------------ ------------ ------------ ---------- -----------
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,781 $ 1,945 $ 56 $ 65,149
EXPENSES:
Mortality and expense risk fees........... 43,360 1,234 1,864 40,567
------------- ------------ ------------ -------------
Net investment income..................... (41,579) 711 (1,808) 24,582
------------- ------------ ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 93,491 922 1,651 --
Net realized gain from sales of
investments............................. 463,603 3,152 (1,221) 60,619
------------- ------------ ------------ -------------
Net realized gain....................... 557,094 4,074 430 60,619
Net unrealized gain (loss)................ 276,190 (12,295) (47,658) (350,436)
------------- ------------ ------------ -------------
Net realized and unrealized gain
(loss)................................ 833,284 (8,221) (47,228) (289,817)
------------- ------------ ------------ -------------
Net increase in net assets from
operations............................ $791,705 $ (7,510) $(49,036) $(265,235)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
OPS
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 3,501 $ 898 $ 1,819 $ 1,056 $ 11,971
EXPENSES:
Mortality and expense risk fees........... 628 260 348 1,583 256 1,997
------------ ----------- ------------- -------- ---------- -------------
Net investment income..................... (628) 3,241 550 236 800 9,974
------------ ----------- ------------- -------- ---------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 2,225 3,196 47,583 3,112 35,913
Net realized gain from sales of
investments............................. (916) (516) 1,934 37,699 224 4,871
------------ ----------- ------------- -------- ---------- -------------
Net realized gain....................... (916) 1,709 5,130 85,282 3,336 40,784
Net unrealized gain (loss)................ (29,462) (11,354) (15,629) (55,045) (8,127) (57,674)
------------ ----------- ------------- -------- ---------- -------------
Net realized and unrealized gain
(loss)................................ (30,378) (9,645) (10,499) 30,237 (4,791) (16,890)
------------ ----------- ------------- -------- ---------- -------------
Net increase in net assets from
operations............................ $(31,006) $(6,404) $ (9,949) $30,473 $(3,991) $ (6,916)
------------ ----------- ------------- -------- ---------- -------------
------------ ----------- ------------- -------- ---------- -------------
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL INTERNATIONAL INDUSTRIAL TOTAL
STOCK EQUITY INCOME RETURN
------------------- ---------------------------- ----------------- ------------
<S> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 11,680 $ -- $ --
EXPENSES:
Mortality and expense risk fees........... 896 11,394 30 200
-------- ---------- --- -----
Net investment income..................... (896) 286 (30) (200)
-------- ---------- --- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- --
Net realized gain from sales of
investments............................. 323 9,242 324 525
-------- ---------- --- -----
Net realized gain....................... 323 9,242 324 525
Net unrealized gain (loss)................ (27,510) (333,972) (247) (739)
-------- ---------- --- -----
Net realized and unrealized gain
(loss)................................ (27,187) (324,730) 77 (214)
-------- ---------- --- -----
Net increase in net assets from
operations............................ $(28,083) $(324,444) $ 47 $(414)
-------- ---------- --- -----
-------- ---------- --- -----
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------------
FOR THE PERIOD
2/17/98** TO 9/30/98
--------------------
INVESTMENT INCOME:
Dividends................................. $ 5,468
EXPENSES:
Mortality and expense risk fees........... 22,795
--------
Net investment income..................... (17,327)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 29,711
Net realized gain from sales of
investments............................. 3,421
--------
Net realized gain....................... 33,132
Net unrealized gain (loss)................ 452,436
--------
Net realized and unrealized gain
(loss)................................ 485,568
--------
Net increase in net assets from
operations............................ $468,241
--------
--------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
CNA
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
----------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ 8,747 $ 591,692 $ 195,897 $ 138,523 $ 534 $ (2,921)
Net realized gain on investments........ 17,266 13,484 -- 311,312 857 9,933
Net unrealized gain (loss) on
investments........................... (145,250) 360,476 -- 183,657 507 (119,618)
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets from
operations............................ (119,237) 965,652 195,897 633,492 1,898 (112,606)
----------- ------------ ------------ ------------ ---------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 676,055 2,980,199 1,605,139 2,382,378 18,129 421,346
Terminations............................ (47,687) (53,707) (47,898) (11,947) (81) (55,014)
Insurance and other charges............. (6,039) (345,058) (684,136) (710,090) (156) (13,531)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (11,755) 1,982,655 (29,097,886) 13,375,518 (31,762) 143,171
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- (251) -- -- -- --
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets from capital
transactions.............................. 610,574 4,563,838 (28,224,781) 15,035,859 (13,870) 495,972
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets.............. 491,337 5,529,490 (28,028,884) 15,669,351 (11,972) 383,366
NET ASSETS:
Beginning of period..................... 1,775,314 9,844,615 28,500,464 8,543,900 39,610 239,055
----------- ------------ ------------ ------------ ---------- ----------
End of period........................... $ 2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
----------- ------------ ------------ ------------ ---------- ----------
----------- ------------ ------------ ------------ ---------- ----------
<CAPTION>
SELECT SELECT SELECT
GROWTH VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (41,579) $ 711 $ (1,808) $ 24,582
Net realized gain on investments........ 557,094 4,074 430 60,619
Net unrealized gain (loss) on
investments........................... 276,190 (12,295) (47,658) (350,436)
------------- ---------- ------------ -------------
Net increase in net assets from
operations............................ 791,705 (7,510) (49,036) (265,235)
------------- ---------- ------------ -------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 2,083,798 149,639 232,167 1,902,015
Terminations............................ (38,487) (44,998) (31,514) (52,253)
Insurance and other charges............. (214,285) (6,310) (9,024) (199,317)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (785,039) (71,967) 106,174 764,111
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- --
------------- ---------- ------------ -------------
Net increase in net assets from capital
transactions.............................. 1,045,987 26,364 297,803 2,414,556
------------- ---------- ------------ -------------
Net increase in net assets.............. 1,837,692 18,854 248,767 2,149,321
NET ASSETS:
Beginning of period..................... 6,982,107 172,162 235,034 5,636,826
------------- ---------- ------------ -------------
End of period........................... $8,819,799 $191,016 $483,801 $7,786,147
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (628) $ 3,241 $ 550 $ 236 $ 800 $ 9,974
Net realized gain on investments........ (916) 1,709 5,130 85,282 3,336 40,784
Net unrealized gain (loss) on
investments........................... (29,462) (11,354) (15,629) (55,045) (8,127 ) (57,674)
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets from
operations............................ (31,006) (6,404) (9,949) 30,473 (3,991 ) (6,916)
------------ ----------- ------------- -------- -------- -------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 94,179 31,039 103,604 248,613 28,087 220,392
Terminations............................ (3,230) (4,865) (23,794) (18,463) (2,212 ) (178)
Insurance and other charges............. (3,932) (2,402) (4,092) (5,885) (2,489 ) (439)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 69,209 (3,857) 2,659 (13,668) (21,384 ) (4,582)
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- -- -- --
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets from capital
transactions.......................... 156,226 19,915 78,377 210,597 2,002 215,193
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets.............. 125,220 13,511 68,428 241,070 (1,989 ) 208,277
NET ASSETS:
Beginning of period..................... 65,385 43,429 58,981 345,559 50,771 371,439
------------ ----------- ------------- -------- -------- -------------
End of period........................... $190,605 $ 56,940 $127,409 $586,629 $48,782 $579,716
------------ ----------- ------------- -------- -------- -------------
------------ ----------- ------------- -------- -------- -------------
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL INTERNATIONAL INDUSTRIAL TOTAL
STOCK EQUITY INCOME RETURN
------------------- -------------------- ----------------- ------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (896) $ 286 $ (30) $ (200)
Net realized gain on investments........ 323 9,242 324 525
Net unrealized gain (loss) on
investments........................... (27,510) (333,972) (247) (739)
-------- ----------- ------- ------------
Net increase in net assets from
operations............................ (28,083) (324,444) 47 (414)
-------- ----------- ------- ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 99,713 5,973 5,817 7,062
Terminations............................ (1,553) (370) (916) (8)
Insurance and other charges............. (3,575) (146,229) (3,909) (636)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 148,748 4,507,342 10 42
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- --
-------- ----------- ------- ------------
Net increase in net assets from capital
transactions.......................... 243,333 4,366,716 1,002 6,460
-------- ----------- ------- ------------
Net increase in net assets.............. 215,250 4,042,272 1,049 6,046
NET ASSETS:
Beginning of period..................... 97,829 82,633 7,211 50,225
-------- ----------- ------- ------------
End of period........................... $313,079 $4,124,905 $ 8,260 $56,271
-------- ----------- ------- ------------
-------- ----------- ------- ------------
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------------
PERIOD FROM
2/17/98** TO 9/30/98
--------------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (17,327)
Net realized gain on investments........ 33,132
Net unrealized gain (loss) on
investments........................... 452,436
--------------------
Net increase in net assets from
operations............................ 468,241
--------------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ --
Terminations............................ --
Insurance and other charges............. (305,243)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 9,881,197
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... --
--------------------
Net increase in net assets from capital
transactions.......................... 9,575,954
--------------------
Net increase in net assets.............. 10,044,195
NET ASSETS:
Beginning of period..................... --
--------------------
End of period........................... $10,044,195
--------------------
--------------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company) established on May 1,
1995 for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Group VEL are
clearly identified and distinguished from the other assets and liabilities of
the Company. Group VEL cannot be charged with liabilities arising out of any
other business of the Company.
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty-one
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc., or of The Morgan Stanley
Universal Funds, Inc. (Morgan Stanley) managed by Miller Anderson & Sherrerd,
LLP. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO and
Morgan Stanley (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act. INVESCO is available only to employees
of INVESCO and its affiliates. Morgan Stanley is available only to employees of
Duke Energy Corporation and its affiliates.
Effective January 9, 1998, the investment portfolio of the Trust, which was
formerly known as Small-Mid Cap Value Fund changed its name to Select Value
Opportunity Fund.
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, Fidelity VIP II, T.
Rowe Price, DGPF, INVESCO, or Morgan Stanley. 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, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, or Morgan
Stanley at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return with First Allmerica. The Company anticipates no tax
liability resulting from the operations of Group VEL. Therefore, no provision
for income taxes has been charged against Group VEL.
SA-7
<PAGE>
PROSPECTUS A
GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
This Prospectus describes certificates ("Certificate" or "Certificates") issued
under group flexible premium variable life insurance policies ("Policy" or
"Policies") offered by Allmerica Financial Life Insurance and Annuity Company
("Company") to eligible applicants ("Certificate Owners") who are members of a
non-qualified benefit plan having a minimum of five or more members, depending
on the group, and are Age 80 years old and under.
The Certificates permit you to allocate Net Premiums among up to 20 of 23
sub-accounts ("Sub-Accounts") of the Group VEL Account ("Separate Account"), a
separate account of the Company, and a fixed interest account ("General
Account") of the Company (together "Accounts"). Each Sub-Account invests its
assets in a corresponding investment portfolio of Allmerica Investment Trust
("Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"), Fidelity
Variable Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price
International Series, Inc. ("T. Rowe Price"), Delaware Group Premium Fund, Inc.
("DGPF"), INVESCO Variable Investment Funds, Inc. ("INVESCO VIF") and Morgan
Stanley Universal Funds, Inc. ("Morgan Stanley"). The following underlying funds
are available under the Certificates:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select Aggressive Growth Fund Overseas Portfolio
Select Capital Appreciation Fund Equity-Income Portfolio
Select Value Opportunity Fund Growth Portfolio
Select Emerging Markets Fund High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VIP II
Select Strategic Growth Fund Asset Manager Portfolio
Growth Fund
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund T. Rowe Price International Stock
Portfolio
Investment Grade Income Fund
Government Bond Fund INVESCO VIF*
Money Market Fund Total Return Fund
Industrial Income Fund
DGPF MORGAN STANLEY**
International Equity Series Fixed Income Portfolio
</TABLE>
(Certain Funds may not be available in all states)
*The Total Return Fund and the Industrial Income Fund of INVESCO VIF are
available only to employees of INVESCO and its affiliates.
**The Morgan Stanley Fixed Income Portfolio of Morgan Stanley is available only
to employees of Duke Energy Corporation and its affiliates.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, FIDELITY VARIABLE INSURANCE PRODUCTS FUND, FIDELITY
VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.,
DELAWARE GROUP PREMIUM FUND, INC., INVESCO VARIABLE INVESTMENT FUNDS, INC. AND
MORGAN STANLEY UNIVERSAL FUNDS, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY
INVEST IN HIGHER-YIELDING, HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE
"INVESTMENT OBJECTIVES AND POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD
RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CERTIFICATES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE
CERTIFICATES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK OR CREDIT UNION. THE CERTIFICATES ARE NOT INSURED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER
FEDERAL AGENCY. INVESTMENTS IN THE CERTIFICATES ARE SUBJECT TO VARIOUS RISKS,
INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1998
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
<PAGE>
(Continued from cover page)
Within limits, you may choose the amount of initial premium desired and the
initial Death Benefit. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Certificate's Surrender Value, or the Certificate may
be fully surrendered at any time, subject to certain limitations.
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (See "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY OR CERTIFICATE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS......................................................................... 5
SUMMARY............................................................................... 8
PERFORMANCE INFORMATION............................................................... 17
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS............ 22
INVESTMENT OBJECTIVES AND POLICIES.................................................... 24
INVESTMENT ADVISORY SERVICES.......................................................... 26
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..................................... 29
VOTING RIGHTS......................................................................... 30
THE CERTIFICATE....................................................................... 30
Enrollment Form for a Certificate................................................... 30
Free-Look Period.................................................................... 31
Conversion Privileges............................................................... 32
Premium Payments.................................................................... 32
Allocation of Net Premiums.......................................................... 33
Transfer Privilege.................................................................. 33
Election of Death Benefit Options................................................... 34
Guideline Premium Test and Cash Value Accumulation Test............................. 34
Death Proceeds...................................................................... 35
Change in Death Benefit Option...................................................... 37
Change in Face Amount............................................................... 38
Certificate Value and Surrender Value............................................... 39
Payment Options..................................................................... 40
Optional Insurance Benefits......................................................... 40
Surrender........................................................................... 41
Paid-Up Insurance Option............................................................ 41
Partial Withdrawal.................................................................. 42
CHARGES AND DEDUCTIONS................................................................ 42
Premium Expense Charge.............................................................. 42
Monthly Deduction from Certificate Value............................................ 43
Charges Reflected in the Assets of the Separate Account............................. 46
Surrender Charge.................................................................... 46
Charges on Partial Withdrawal....................................................... 47
Transfer Charges.................................................................... 48
Charge for Change in Face Amount.................................................... 48
Other Administrative Charges........................................................ 48
CERTIFICATE LOANS..................................................................... 49
CERTIFICATE TERMINATION AND REINSTATEMENT............................................. 50
OTHER CERTIFICATE PROVISIONS.......................................................... 51
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY....................................... 54
DISTRIBUTION.......................................................................... 55
SERVICES.............................................................................. 55
REPORTS............................................................................... 55
LEGAL PROCEEDINGS..................................................................... 56
FURTHER INFORMATION................................................................... 56
INDEPENDENT ACCOUNTANTS............................................................... 56
FEDERAL TAX CONSIDERATIONS............................................................ 56
The Company and the Separate Account................................................ 56
Taxation of the Certificates........................................................ 57
Certificate Loans................................................................... 57
Modified Endowment Contracts........................................................ 58
MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................................ 58
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS.................................................................. 60
APPENDIX A -- OPTIONAL BENEFITS....................................................... A-1
APPENDIX B -- PAYMENT OPTIONS......................................................... B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES AND ACCUMULATED
PREMIUMS............................................................................. C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES................................ D-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
COMPANY: Allmerica Financial Life Insurance and Annuity Company.
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard Ordinary
Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex
Certificates), net investment earnings at an annual effective rate of 5%, and
fees and charges as set forth in the Certificate and any
5
<PAGE>
Certificate riders. The Death Benefit Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
MINIMUM DEATH BENEFIT: The minimum Death Benefit required to qualify the
Certificate as "life insurance" under federal tax laws. The Minimum Death
Benefit varies by Age. It is calculated by multiplying the Certificate Value by
a percentage determined by the Insured's Age.
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
NET PREMIUM: An amount equal to the premium less any premium expense charge.
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Fidelity Variable Insurance Products
Fund or the Fidelity Variable Insurance Products Fund II, the T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc. or the
International Equity Series of the Delaware Group Premium Fund, Inc. The Total
Return Fund and the Industrial Income Fund of INVESCO VIF are available only to
employees of INVESCO Funds Group, Inc. and its affiliates. The Morgan Stanley
Universal Funds Inc. Fixed Income Portfolio is available only to employees of
Duke Energy Corporation and its affiliates.
6
<PAGE>
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
UNDERLYING FUNDS ("FUNDS"): The Funds of Allmerica Investment Trust, the
Portfolios of Fidelity Variable Insurance Products Fund and Fidelity Variable
Insurance Products Fund II, the Portfolio of T. Rowe Price International Series,
Inc., the Series of Delaware Group Premium Fund, Inc., the Funds of INVESCO
Variable Investment Funds, Inc., and the Portfolio of Morgan Stanley Universal
Funds, Inc., which are available under the Certificates.
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
UNIT: A measure of your interest in a Sub-Account.
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, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
WRITTEN REQUEST: A request by the Certificate Owner in writing, satisfactory to
the Company.
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
7
<PAGE>
SUMMARY
THE CERTIFICATE
The Certificate issued under a group flexible premium variable life policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
- life insurance coverage on the named Insured;
- Certificate Value;
- surrender rights and partial withdrawal rights;
- loan privileges; and
- in some cases, additional insurance benefits available by rider for an
additional charge.
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. Although you may establish a schedule of premium payments
("planned premium payments"), failure to make the planned premium payments will
not necessarily cause a Certificate to lapse, nor will making the planned
premium payments guarantee that a Certificate will remain in force. Thus, you
may, but are not required to, pay additional premiums.
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
SURRENDER CHARGES
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
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SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
A separate surrender charge may apply to and be calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge of up to $8.50
per thousand dollars of increase, and (b) is a deferred sales charge of up to
50% (less any premium expense charge not associated with state and local premium
taxes) of premiums associated with the increase, up to the Guideline Annual
Premium for the increase. In accordance with limitations under state insurance
regulations, the amount of the surrender charge will not exceed a specified
amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge."
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from zero to 1% of premiums, depending on the group to which
the Policy is issued. The charge for distribution expenses may range from zero
to 10%. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the unpaid balance will be totaled and the
Company will make a Pro-Rata Allocation.
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<PAGE>
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from Certificate Value."
TRANSACTION CHARGES
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
TRANSFER CHARGE
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
CHARGES OF THE UNDERLYING INVESTMENT FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. See CHARGES AND
DEDUCTIONS -- "Charges Reflected in the Assets of the Separate Account." The
levels of fees and expenses vary among the Underlying Investment Funds.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has been allocated, and partial withdrawals. The Certificate Value may be
relevant to the computation of the Death Proceeds. You bear the entire
investment risk for amounts allocated to the Separate Account. The Company does
not guarantee a minimum Certificate Value.
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The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
DEATH PROCEEDS
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the Face Amount plus the Certificate Value or the Minimum Death
Benefit. The Minimum Death Benefit is equivalent to a percentage (determined
each month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE CERTIFICATE -- "Death Proceeds."
The Death Proceeds under the Certificate may be received in a lump sum or under
one of the Payment Options the Company offers. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST DEATH BENEFIT
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Change in Face Amount."
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider and Exchange
Option Rider. See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
CERTIFICATE ISSUANCE
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examination, if any, are completed. If the proposed Insured cannot
answer the eligibility questions "No," and if the proposed Insured is not a
standard risk, insurance coverage will begin only after the Company (1) approves
the enrollment form, (2) the Certificate is delivered and accepted, and (3) the
first premium is paid.
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<PAGE>
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
If your Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be allocated to the Money Market Fund of the Trust upon
Issuance and Acceptance of the Certificate. All Certificate Value will be
allocated as you have chosen no later than the expiration of the period during
which you may exercise the "Right-to-Examine Certificate" provision.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
INVESTMENT OPTIONS
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account is currently comprised
of 23 Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
Underlying Fund of the Allmerica Investment Trust ("Trust") managed by Allmerica
Financial Investment Management Services, Inc. ("AFIMS"), of the Fidelity
Variable Insurance Products Fund ("Fidelity VIP") of the Fidelity Variable
Insurance Products Fund II ("Fidelity VIP II") managed by Fidelity Management,
of T. Rowe Price International Series, Inc. ("T. Rowe Price") managed by Rowe
Price-Fleming International, Inc., of the Delaware Group Premium Fund, Inc.
("DGPF") managed by Delaware International, of INVESCO Variable Investment
Funds, Inc. ("INVESCO VIF") managed by INVESCO, or of Morgan Stanley Universal
Funds, Inc. (Morgan Stanley), managed by Miller, Anderson and Sherrerd, LLP
("MAS"). INVESCO VIF is available only to employees of INVESCO and its
affiliates, and the Morgan Stanley Universal Funds, Inc. is available only to
employees of Duke Energy Corporation and its affiliates. In some states,
insurance regulations may restrict the availability of particular Underlying
Funds. The Certificates permit you to transfer Certificate Value among the
available Sub-Accounts and between the Sub-Accounts and the General Account,
subject to certain limitations described under THE CERTIFICATE -- "Transfer
Privilege."
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table
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shows the expenses of the Underlying Funds for 1997. For more information
concerning fees and expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER FUND
(AFTER ANY EXPENSES (AFTER ANY
VOLUNTARY APPLICABLE TOTAL FUND
UNDERLYING FUND WAIVER) REIMBURSEMENTS) EXPENSES
- --------------------------------------------------------------- ------------------ --------------------- ---------------
<S> <C> <C> <C>
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 Emerging Markets Fund (@)............................... 1.35% 0.65% 2.00%(1)
Select International Equity Fund............................... 0.92%* 0.20% 1.12%(1)(3)
DGPF International Equity Series............................... 0.75%(4) 0.15% 0.90%(4)
Fidelity VIP Overseas Portfolio................................ 0.75% 0.17% 0.92%(2)
T. Rowe Price International Stock Portfolio.................... 1.05% 0.00% 1.05%
Select Growth Fund............................................. 0.85% 0.08% 0.93%(1)(3)
Select Strategic Growth Fund (@)............................... 0.85% 0.13% 0.98%(1)
Growth Fund.................................................... 0.46%* 0.06% 0.52%(1)(3)
Fidelity VIP Growth Portfolio.................................. 0.60% 0.09% 0.69%(2)
Equity Index Fund.............................................. 0.31% 0.13% 0.44%(1)
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 II Asset Manager Portfolio........................ 0.55% 0.10% 0.65%(2)
Fidelity VIP High Income Portfolio............................. 0.59% 0.12% 0.71%
Investment Grade Income Fund................................... 0.44%* 0.10% 0.54%(1)
Government Bond Fund........................................... 0.50% 0.17% 0.67%(1)
Money Market Fund.............................................. 0.27% 0.08% 0.35%(1)
INVESCO VIF Industrial Income Fund............................. 0.75% 0.16% 0.91%(##)
INVESCO VIF Total Return Fund.................................. 0.75% 0.17% 0.92%(##)
Morgan Stanley Fixed Income Portfolio.......................... 0.40% 0.30% 0.70%(+)
</TABLE>
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
** 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 rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% 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 limitations took effect on January 1, 1997. Without these
adjustments, the management fee ratio and the total fund expense ratio would
have been 0.95% and 1.09%, respectively. The management fee limitation may be
terminated at any time.
(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Investment
Grade Income Fund and Government Bond Fund, and 0.60% for the Money Market Fund
and Equity Index Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1997.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee
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to the extent that expenses of the Select Emerging Markets Fund exceed 2.00% of
the Fund's average daily net assets, except that such waiver shall not exceed
the net amount of management fees earned by AFIMS from the Fund after
subtracting fees paid by AFIMS to a sub-adviser.
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity-Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas Portfolio and
0.64% for Fidelity VIP II Asset Manager Portfolio.
(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expense ratios would have been 0.93% for the
Select Aggressive Growth Fund, 1.10% for the Select International Equity Fund,
0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for the
Select Value Opportunity Fund, and 0.74% for the Select Growth and Income Fund.
(4) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntary limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.
(##) Various expenses of the Industrial Income Fund and Total Return Fund were
voluntarily absorbed by INVESCO in 1997. If such expenses had not been
voluntarily absorbed, the total operating expenses ratios would have been 0.97%
and 1.10%, respectively.
(+) MAS has voluntarily agreed to waive its management fees and to reimburse the
Fixed Income Portfolio if processing of such fees would cause the total annual
operating expense of the portfolio to exceed 0.70% of average daily net assets.
This fee waiver is voluntary and may be terminated by MAS at any time without
notice.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
If your Certificate provides for a full refund of the initial premium under its
"Right-to-Examine Certificate" provision as required in your state, your refund
will be the greater of (a) your entire premium, or (b) the Certificate Value
plus deductions under the Certificate, or by the Underlying Funds for taxes,
charges or fees. If your Certificate does not provide for a full refund of the
initial premium, you will receive the Certificate Value in the Separate Account,
plus premiums paid, including fees and charges, minus the amounts allocated to
the Separate Account, plus the fees and charges imposed on amounts in the
Separate Account. After an increase in The Face Amount, a right to cancel the
increase also applies. See THE CERTIFICATE -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to
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<PAGE>
allocate all future premiums to the General Account. A similar conversion
privilege is in effect for 24 Certificate months after the date of an increase
in the Face Amount. Where required by state law, and at your request, the
Company will issue a flexible premium adjustable life insurance Certificate to
you. The new Certificate will have the same face amount, issue Age, Date of
Issue, and risk classifications as the original Certificate. See THE CERTIFICATE
- -- "Conversion Privileges."
PARTIAL WITHDRAWAL
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by the amount of the partial withdrawal charge
deducted. See THE CERTIFICATE -- "Partial Withdrawal" and CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal."
LOAN PRIVILEGE
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge, Monthly Deductions, and
interest on the Certificate loan to the end of the Certificate year. Thereafter,
Loan Value is 90% of an amount equal to Certificate Value less the surrender
charge.
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the Accounts. In either
case, Certificate Value equal to the Certificate loan will be transferred from
the appropriate Sub-Accounts to the General Account, and will earn monthly
interest at an effective annual rate of at least 6%. Therefore, a Certificate
loan may have a permanent impact on the Certificate Value even though it is
eventually repaid. Although the loan amount is a part of the Certificate Value,
the Death Proceeds will be reduced by the amount of outstanding Debt at the time
of death.
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
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<PAGE>
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
CERTIFICATE LAPSE AND REINSTATEMENT
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
TAX TREATMENT
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Certificate. Death Proceeds under the Certificate are excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
The Certificate summarizes the provisions of the group Policy under which it is
issued, which has the purpose of providing insurance protection for the
Beneficiary named therein. References to Certificate rights and features are
intended to represent a Certificate Owner's rights and benefits under the group
Policy. This Summary is intended to provide only a very brief overview of the
more significant aspects of the Certificate. Further detail is provided in this
Prospectus, the Certificate and the group Policy. No claim is made that the
Certificate is in any way similar or comparable to a systematic investment plan
of a mutual fund.
16
<PAGE>
PERFORMANCE INFORMATION
The Certificates were first offered to the public in 1995. However, the Company
may advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Sub-Accounts have been in existence
(Tables I[A] and I[B]), and based on the periods that the Underlying Funds have
been in existence (Tables II[A] and II[B]). The results for any period prior to
the Certificates being offered will be calculated as if the Certificates had
been offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in Table I) under a
"representative" Certificate that is surrendered at the end of the applicable
period. For more information on charges under the Certificates, see CHARGES AND
DEDUCTIONS.
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1997. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare 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 life separate accounts or other
investment products tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds and other investment products
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons, such as Morningstar, Inc., who
rank such investment products on overall performance or other criteria; or (3)
the Consumer Price Index (a measure for inflation) to assess the real rate of
return from an investment. 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 Services, Inc. ("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
Portfolios.
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. 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 invest ment scenarios, financial management and tax
and retirement planning, and investment alternatives to certificates of deposit
and other financial instruments.
17
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (non-smoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
<TABLE>
<CAPTION>
TEN YEARS
FOR YEAR OR SINCE
ENDED FIVE INCEPTION
UNDERLYING FUNDS 12/31/97 YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -97.09% N/A -3.84%
Select Capital Appreciation Fund -100.00% N/A -4.62%
Select Value Opportunity Fund -91.46% N/A -3.22%
T. Rowe Price International Stock Portfolio -100.00% N/A -52.29%
Fidelity VIP Overseas Portfolio -100.00% N/A -16.93%
Select International Equity Fund -100.00% N/A -13.90%
DGPF International Equity Series -100.00% N/A -71.01%
Fidelity VIP Growth Portfolio -92.71% N/A -3.55%
Select Growth Fund -83.01% N/A 1.25%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -91.20% N/A -2.51%
Equity Index Fund -84.52% N/A 2.13%
Fidelity VIP Equity-Income Portfolio -88.47% N/A -3.76%
Select Growth and Income Fund -93.61% N/A -2.67%
Fidelity VIP II Asset Manager Portfolio -95.32% N/A -10.12%
Fidelity VIP High Income Portfolio -98.05% N/A -12.49%
Investment Grade Income Fund -100.00% N/A -20.75%
Government Bond Fund -100.00% N/A -23.08%
Money Market Fund -100.00% N/A -25.16%
INVESCO VIF Industrial Income Fund -88.41% N/A -57.69%
INVESCO VIF Total Return Fund -93.24% N/A -63.16%
</TABLE>
The inception dates for the Sub-Accounts are: 5/1/95 for Growth, for Investment
Grade Income, for Money Market, for Equity Index, for Government Bond, for
Select Aggressive Growth, for Select Growth, for Select Growth and Income, for
Select Value Opportunity, for Select International Equity, for Fidelity VIP
Equity-Income, for Fidelity VIP Growth, for Fidelity VIP High Income, for
Fidelity VIP Overseas and for Fidelity VIP II Asset Manager; 5/3/95 for the
Select Capital Appreciation Fund; 7/2/96 for DGPF International Equity; 2/12/96
for the T. Rowe Price International Stock; and 7/2/96 for INVESCO VIF Industrial
Income and for INVESCO VIF Total Return. The Select Emerging Markets Fund and
the Select Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
18
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, all Sub-Account charges, and premium tax and expense
charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
TEN YEARS
FOR YEAR OR SINCE
ENDED FIVE INCEPTION
UNDERLYING FUNDS 12/31/97 YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.94% N/A 22.62%
Select Capital Appreciation Fund 13.54% N/A 22.09%
Select Value Opportunity Fund 24.04% N/A 23.16%
T. Rowe Price International Stock Portfolio 2.42% N/A 6.99%
Fidelity VIP Overseas Portfolio 10.83% N/A 11.41%
Select International Equity Fund 3.97% N/A 13.97%
DGPF International Equity Series 5.91% N/A 10.12%
Fidelity VIP Growth Portfolio 22.68% N/A 22.87%
Select Growth Fund 33.19% N/A 27.08%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.32% N/A 23.78%
Equity Index Fund 31.55% N/A 27.85%
Fidelity VIP Equity-Income Portfolio 27.28% N/A 22.69%
Select Growth and Income Fund 21.71% N/A 23.64%
Fidelity VIP II Asset Manager Portfolio 19.86% N/A 17.19%
Fidelity VIP High Income Portfolio 16.90% N/A 15.17%
Investment Grade Income Fund 8.74% N/A 8.22%
Government Bond Fund 6.38% N/A 6.30%
Money Market Fund 4.78% N/A 4.60%
INVESCO VIF Industrial Income Fund 27.34% N/A 24.09%
INVESCO VIF Total Return Fund 22.11% N/A 19.09%
</TABLE>
The inception dates for the Sub-Accounts are: 5/1/95 for Growth, for Investment
Grade Income, for Money Market, for Equity Index, for Government Bond, for
Select Aggressive Growth, for Select Growth, for Select Growth and Income, for
Select Value Opportunity, for Select International Equity, for Fidelity VIP
Equity-Income, for Fidelity VIP Growth, for Fidelity VIP High Income, for
Fidelity VIP Overseas and for Fidelity VIP II Asset Manager; 5/3/95 for the
Select Capital Appreciation Fund; 7/2/96 for DGPF International Equity; 2/12/96
for the T. Rowe Price International Stock; 7/2/96 for INVESCO VIF Industrial
Income and for INVESCO VIF Total Return. The Select Emerging Markets Fund and
the Select Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
19
<PAGE>
TABLE II(A):
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (nonsmoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
<TABLE>
<CAPTION>
TEN YEARS
FOR YEAR OR SINCE
ENDED FIVE INCEPTION
UNDERLYING FUNDS 12/31/97 YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund -97.09% 11.26% 14.29%
Select Capital Appreciation Fund -100.00% N/A -4.18%
Select Value Opportunity Fund -91.46% N/A 10.28%
T. Rowe Price International Stock Portfolio -100.00% N/A -3.43%
Fidelity VIP Overseas Portfolio -100.00% 8.59% 6.20%
Select International Equity Fund -100.00% N/A -0.92%
DGPF International Equity Series -100.00% 6.12% 5.88%
Fidelity VIP Growth Portfolio -92.71% 12.46% 13.93%
Select Growth Fund -83.01% 9.62% 11.09%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund -91.20% 10.83% 13.85%
Equity Index Fund -84.52% 13.99% 15.51%
Fidelity VIP Equity-Income Portfolio -88.47% 14.62% 13.45%
Select Growth and Income Fund -93.61% 11.03% 10.08%
Fidelity VIP II Asset Manager Portfolio -95.32% 7.45% 8.90%
Fidelity VIP High Income Portfolio -98.05% 8.38% 9.46%
Investment Grade Income Fund -100.00% 1.98% 5.76%
Government Bond Fund -100.00% 0.43% 2.16%
Money Market Fund -100.00% -0.82% 2.27%
INVESCO VIF Industrial Income Fund -88.41% N/A 9.89%
INVESCO VIF Total Return Fund -93.24% N/A 3.96%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for the T. Rowe Price
International Stock; 8/10/94 for INVESCO VIF Industrial Income; and 6/2/94 for
INVESCO VIF Total Return. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
20
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE
OR SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
TEN YEARS
FOR YEAR OR SINCE
ENDED FIVE INCEPTION
UNDERLYING FUNDS 12/31/97 YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select Aggressive Growth Fund 17.94% 16.04% 18.79%
Select Capital Appreciation Fund 13.54% N/A 22.09%
Select Value Opportunity Fund 24.04% N/A 16.17%
T. Rowe Price International Stock Portfolio 2.42% N/A 7.37%
Fidelity VIP Overseas Portfolio 10.83% 13.38% 8.91%
Select International Equity Fund 3.97% N/A 10.42%
DGPF International Equity Series 5.91% 10.92% 10.57%
Fidelity VIP Growth Portfolio 22.68% 17.23% 16.43%
Select Growth Fund 33.19% 14.40% 15.61%
Select Strategic Growth Fund N/A N/A N/A
Growth Fund 24.32% 15.61% 16.36%
Equity Index Fund 31.55% 18.76% 18.90%
Fidelity VIP Equity-Income Portfolio 27.28% 19.38% 15.96%
Select Growth and Income Fund 21.71% 15.81% 14.61%
Fidelity VIP II Asset Manager Portfolio 19.86% 12.24% 12.00%
Fidelity VIP High Income Portfolio 16.90% 13.17% 12.07%
Investment Grade Income Fund 8.74% 6.81% 8.48%
Government Bond Fund 6.38% 5.27% 6.19%
Money Market Fund 4.78% 4.03% 5.11%
INVESCO VIF Industrial Income Fund 27.34% N/A 22.59%
INVESCO VIF Total Return Fund 22.11% N/A 15.63%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for the T. Rowe Price
International Stock; 8/10/94 for INVESCO VIF Industrial Income; and 6/2/94 for
INVESCO VIF Total Return. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
21
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000 ("Principal Office"). Prior to
October 1, 1995, the Company was known as SMA Life Assurance Company. As of
December 31, 1997, the Company had over $9.4 billion in assets. The Company 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, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. The Company is an indirectly
wholly owned subsidiary of First Allmerica Financial Life Insurance Company
("First Allmerica"), formerly State Mutual Life Assurance Company of America,
440 Lincoln Street, Worcester, Massachusetts. First Allmerica, organized under
the laws of Massachusetts in 1844, is the fifth oldest life insurance company in
America.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 22, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account and are kept separate and apart from the general assets
of the Company. Under Delaware law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 23 Sub-Accounts. Each Sub-Account is administered and accounted for as part
of the general business of the Company, but the income, capital gains, or
capital losses of each Sub-Account are allocated to such Sub-Account, without
regard to other income, capital gains, or capital losses of the Company or the
other Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio ("Underlying Fund") of the Allmerica Investment Trust, the
Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc., the Delaware Group
Premium Fund, Inc., the INVESCO Variable Investment Fund, Inc., or the Morgan
Stanley Universal Funds, Inc.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust, formerly SMA Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of the Trust or its separate investment
Funds.
22
<PAGE>
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 First Allmerica, the Company, or other
affiliated insurance companies. Thirteen investment portfolios of the Trust
("Funds") are available under the Certificates, each issuing a series of shares:
Select Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Emerging Markets Fund, Select International Equity
Fund, Select Growth Fund, Select Strategic Growth Fund, Growth Fund, Equity
Index Fund, Select Growth and Income Fund, Investment Grade Income Fund,
Government Bond Fund, and 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 generally 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 separate accounts.
AFIMS serves as 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.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and is registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Certificates: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio
and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. 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 and Fidelity VIP II Funds."
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see "Investment Advisory Services to Fidelity VIP and Fidelity VIP II Funds"),
is an open-end, diversified, management investment company organized as a
Massachusetts business trust on March 21, 1988 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the
Certificates: the Fidelity VIP II Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (see "Investment Advisory
Services to T. Rowe Price"), is an open-end, diversified, management investment
company organized as a Maryland corporation in 1994 and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Certificates: the T. Rowe Price International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. DGPF
was established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
23
<PAGE>
portfolio is available under the Certificates: the International Equity Series
("Series"). The investment adviser for the International Equity Series is
Delaware International Advisers Ltd. ("Delaware International"). See "Investment
Advisory Services to DGPF."
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. ("INVESCO VIF") is an open-end,
diversified, management investment company that was organized as a Maryland
corporation on August 19, 1993, and is registered with the SEC under the 1940
Act. INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser of the
Industrial Income Fund and the Total Return Fund, the only Funds of INVESCO VIF
that are available under the Certificates. These two Funds are available only to
employees of INVESCO and its affiliates.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Morgan Stanley Universal Funds, Inc. ("Morgan Stanley") is an open-end,
management investment company that was organized as a Maryland corporation, and
is registered with the SEC under the 1940 Act. Miller Anderson & Sherrerd, LLP
("MAS") is the investment adviser for the Morgan Stanley Fixed Income Portfolio.
The Morgan Stanley Fixed Income Portfolio is the only portfolio of Morgan
Stanley Universal Funds, Inc. that is available under the Certificates. This
Portfolio is available only to employees of Duke Energy Corporation and its
affiliates.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
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.
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 invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a 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.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
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<PAGE>
FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
GROWTH FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Growth Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
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.
EQUITY INDEX FUND -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500.
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.
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. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money market instruments.
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 often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.
INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of fixed
income securities with the objective of seeking as high a level of total return
(including both income and capital appreciation) as is consistent with prudent
investment management.
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
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<PAGE>
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
THE FOLLOWING FUNDS OF INVESCO VARIABLE INVESTMENT FUNDS, INC. ARE AVAILABLE
ONLY TO EMPLOYEES OF INVESCO AND ITS AFFILIATES:
INVESCO VIF INDUSTRIAL INCOME FUND -- seeks the best possible current income
while following sound investment practices. Capital growth potential is an
additional but secondary consideration in the selection of portfolio securities.
The Fund seeks to achieve its objective by investing in securities which will
provide a relatively high yield and stable return and which, over a period of
years, may also provide capital appreciation.
INVESCO VIF TOTAL RETURN FUND -- seeks a high total return on investment through
capital appreciation and current income by investing in a combination of equity
securities (consisting of common stocks and, to a lesser degree, securities
convertible into common stock) and fixed income securities.
THE FOLLOWING PORTFOLIO OF MORGAN STANLEY UNIVERSAL FUNDS, INC. IS AVAILABLE
ONLY TO EMPLOYEES OF DUKE ENERGY CORPORATION AND ITS AFFILIATES:
FIXED INCOME PORTFOLIO -- seeks above-average return over a market cycle of
three to five years by investing primarily in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Mortgage-Backed Securities, Foreign
Bonds and other Fixed-Income Securities and Derivatives as further described in
the Morgan Stanley Universal Funds, Inc. prospectus. The Portfolio's average
weighted maturity will ordinarily exceed five years, and will usually be between
five and fifteen years.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trust has entered into a Management Agreement with AFIMS,
an indirect wholly owned subsidiary of First Allmerica, to handle the day-to-day
affairs of the Trust. AFIMS, subject to review by the Trustees, is responsible
for the general management of the Funds. AFIMS also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities, and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with AFIMS.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, and reports to shareholders, and
other expenses.
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<PAGE>
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund.
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation First $100 million
Fund 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 Emerging Markets Fund * 1.35%
Select International Equity First $100 million
Fund 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Growth Fund * 0.85%
Select Strategic Growth Fund * 0.85%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Next $250 million 0.65%
Over $500 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
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<PAGE>
* For the Select Emerging Markets Fund, the Select Growth Fund, the Select
Strategic Growth Fund, and the Government Bond Fund, the investment management
fee does not vary according to the level of assets in the Fund. AFIMS' fee
computed for each Fund will be paid from the assets of such Fund. AFIMS is
solely responsible for the payment of all fees for investment management
services to the Sub-Advisers.
The prospectus of the Trust contains additional information concerning the
Funds, including information concerning additional expenses paid by the Funds,
and paid to the Sub-Advisers, and should be read in conjunction with this
Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectuses of Fidelity VIP and Fidelity VIP II contain additional
information concerning the Portfolios, including information concerning
additional expenses paid by the Portfolios, and should be read in conjunction
with this Prospectus.
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 FMR. On an annual basis, this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas and
the Fidelity VIP II Asset Manager Portfolios' fee rates are each made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.45% for the
Fidelity VIP Overseas Portfolio and 0.25% for the Fidelity VIP II Asset
Manager Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee of as high as 0.82%
of its average net assets. The Fidelity VIP Equity-Income Portfolio may have a
fee of as high as 0.72% of its average net assets. The Fidelity VIP Growth
Portfolio may have a fee of as high as 0.82% of its average net assets. The
Fidelity VIP Overseas Portfolio may have a fee of as high as 0.97% of its
average net assets. The Fidelity VIP II Asset Manager Portfolio may have a fee
of as high as 0.77% of its average net assets. The actual fee rate may be less
depending on the total assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers with approximately $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
average daily net assets.
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<PAGE>
INVESTMENT ADVISORY SERVICES TO DGPF
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
INVESTMENT ADVISORY SERVICES TO INVESCO VIF
INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser for INVESCO VIF,
and is primarily responsible for providing various investment management
administration services and supervising daily business affairs. The Industrial
Income Fund and the Total Return Fund each pay INVESCO a monthly fee equal to
0.75% annually of the first $500 million of the Fund's average daily net assets;
0.65% of the next $500 million of the Fund's average net assets and 0.55% of the
Fund's average net assets in excess of $1 billion. The prospectus of INVESCO VIF
contains additional information concerning other expenses paid by the Funds.
INVESTMENT ADVISORY SERVICES TO MORGAN STANLEY
Miller Anderson & Sherrerd, LLP ("MAS") is the investment adviser for the Morgan
Stanley Fixed Income Portfolio. MAS makes the Portfolio's day-to-day investment
decisions, arranges for the execution of Portfolio transactions, and generally
manages the Portfolio's investments. MAS is entitled to receive a management fee
from the Morgan Stanley Fixed Income Portfolio, payable quarterly, at an annual
rate of 0.40% of the first $500 million of the Portfolio's average daily net
assets; 0.35% from $500 million to $1 billion of the Portfolio's average daily
net assets and 0.30% of the Portfolio's net assets in excess of $1 billion.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem 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 Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate 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 Certificate
Owners on a basis to be determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price, the Series of DGPF, the Funds of INVESCO VIF and the
Portfolio of Morgan Stanley are also issued to variable annuity and variable
life separate accounts of other unaffiliated insurance companies ("mixed and
shared funding"). It is conceivable that in the future such mixed funding or
shared funding may be disadvantageous for variable life contract owners or
variable annuity contract owners. Although the Company and the Underlying
Investment Companies do not currently foresee any such disadvantages to either
variable life insurance contract owners or variable annuity contract owners, the
29
<PAGE>
Company and the respective Trustees intend to monitor events in order to
identify any material conflicts between such contract owners and to determine
what action, if any, should be taken in response thereto. If the Trustees were
to conclude that separate funds should be established for variable life and
variable annuity separate accounts, the Company will bear the attendant
expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement change, the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. 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 Certificates, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Certificate Owners or the Trustees. The Company's disapproval of
any such change must be reasonable and, in the case of a change in investment
policies or investment adviser, based on a good faith determination that such
change would be contrary to state law or otherwise is inappropriate in light of
the objectives and purposes of the Underlying Funds. In the event the Company
does disregard voting instructions, a summary of and the reasons for that action
will be included in the next periodic report to Certificate Owners.
THE CERTIFICATE
ENROLLMENT FORM FOR A CERTIFICATE
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
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<PAGE>
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company (1) approves
the enrollment form, (2) the Certificate is delivered and accepted, and (3) the
first premium is paid.
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt of the premium at the Principal Office. IF THE
CERTIFICATE IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
If the Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be transferred to the Sub-Account investing in the Money
Market Fund of the Trust upon Issuance and Acceptance of the Certificate. All
Certificate Value will be allocated as you have chosen not later than the
expiration of the period during which you may exercise the "Right-to-Examine
Certificate" provision. If the "Payor Provision" is in effect, (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Payor Provisions"), Payor premiums which are
not "excess premiums" will be transferred to the Monthly Deduction Sub-Account
not later than three days after underwriting approval of the Certificate.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will, within seven days, mail a
refund. (The refund of any premium paid by check may be delayed until the check
has cleared your bank.) If the Certificate provides for a full refund of the
initial premium under its "Right-to-Examine Certificate" provision as required
in your state, your refund will be the greater of (a) your entire premium, or
(b) the Certificate Value plus deductions under the Certificate or by the
Underlying Funds for taxes, charges or fees. If the Certificate does not provide
for a full refund of the initial premium, you will receive the Certificate Value
in the Separate Account, plus premiums paid, including fees and charges, minus
the amounts allocated to the Separate Account, plus the fees and charges imposed
on amounts in the Separate Account.
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but for the increase. The amount to be
credited will be refunded if you so request. The Company will also waive any
surrender charge calculated for the increase.
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<PAGE>
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $50.
Premiums are not limited as to frequency and number. However, no premium payment
may be less than $100 without the Company's consent. Moreover, premium payments
must be sufficient to cover the next Monthly Deduction plus loan interest
accrued, or the Certificate may lapse. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Certificate, if required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the
Death Benefit Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Certificate during a
Certificate year. See CERTIFICATE TERMINATION AND REINSTATEMENT.
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<PAGE>
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%. You may change the allocation of future Net
Premiums at any time pursuant to written or telephone request. If allocation
changes by telephone are elected by the Certificate Owner, a properly completed
authorization form must be on file before telephone requests will be honored.
The policy of the Company and its agents and affiliates is that they will not be
responsible for losses resulting from acting upon telephone requests reasonably
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a Certificate Owner identify themselves
by name and identify the Certificate Owner by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded. An
allocation change will be effective as of the date of receipt of the notice at
the Principal Office. No charge is currently imposed for changing premium
allocation instructions. The Company reserves the right to impose such a charge
in the future, but guarantees that the charge will not exceed $25.
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Transfers involving the General Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the General Account; and
(b) The amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Certificate.
These rules are subject to change by the Company.
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts ("Dollar Cost
Averaging Option"), or (b) to automatically reallocate Certificate Value among
the Sub-Accounts ("Automatic Rebalancing Option"). Automatic transfers may be
made on a monthly, bimonthly, quarterly, semiannual or annual schedule.
Generally, all transfers will be processed on the 15th of each scheduled month.
However, if the 15th is not a business day or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The Dollar
Cost Averaging Option and the Automatic Rebalancing Option may not be in effect
at the same time.
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TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and (4)
the maximum amount that may be transferred each time from the General Account.
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge. Any transfers made with respect to a conversion privilege, Certificate
loan or material change in investment policy will not count towards the twelve
free transfers.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a minimum death benefit in relation to cash value for a
Certificate to qualify as life insurance. Under current federal tax law, either
the Guideline Premium test or the Cash Value Accumulation test can be used to
determine if the Certificate complies with the definition of "life insurance" in
Section 7702 of the Code. At the time of application, the Employer may elect
either of the tests.
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. If the Cash Value Accumulation
test is chosen by the employer, ONLY Death Benefit Option 3 will apply. Death
Benefits Option 1 and Option 2 are NOT available under the Cash Value
Accumulation test.
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the minimum
Death Benefit relative to the Certificate Value are different. Required
increases in the minimum Death Benefit due to growth in Certificate Value will
generally be greater under the Cash Value Accumulation test than under the
Guideline Premium test. APPLICANTS FOR A POLICY SHOULD CONSULT A QUALIFIED TAX
ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
OPTION 1 -- LEVEL DEATH BENEFIT
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Minimum Death Benefit, as set forth in the table below. Under Option 1, the
Death Benefit will remain level unless the Minimum Death Benefit is greater than
the Face Amount, in which case the Death Benefit will vary as the Certificate
Value varies. Option 1 will offer the best opportunity for the Certificate Value
under a Certificate to increase without increasing the Death Benefit as quickly
as it might under the other options. The Death Benefit will never go below the
Face Amount.
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OPTION 2 -- ADJUSTABLE DEATH BENEFIT
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Minimum Death Benefit, as set forth in the
table below. The Death Benefit will, therefore, vary as the Certificate Value
changes, but will never be less than the Face Amount. Option 2 will offer the
best opportunity for the Certificate Owner who would like to have an increasing
Death Benefit as early as possible. The Death Benefit will increase whenever
there is an increase in the Certificate Value, and will decrease whenever there
is a decrease in the Certificate Value, but will never go below the Face Amount.
OPTION 3 - LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the Certificate at the "seven-pay"
limit for the full seven years. When the Certificate Value multiplied by the
applicable Death Benefit Factor exceeds the Face Amount, the Death Benefit will
increase whenever there is an increase in the Certificate Value, and will
decrease whenever there is a decrease in the Certificate Value, but will never
go below the Face Amount. OPTION 3 MAY NOT BE AVAILABLE IN ALL STATES.
DEATH PROCEEDS
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will be determined as of the date of the
Company's receipt of due proof of the Insured's death.
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
The Minimum Death Benefit under Option 1 or Option 2 is equal to a percentage of
the Certificate Value as set forth below. The Minimum Death Benefit is
determined in accordance with the Code regulations to ensure that the
Certificate qualifies as a life insurance contract and that the insurance
proceeds may be excluded from the gross income of the Beneficiary.
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MINIMUM DEATH BENEFIT TABLE
(Option 1 and Option 2)
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Certificate Value
- ------------------------------------------------------------- -----------------
<S> <C>
40 and under................................................. 250%
45........................................................... 215%
50........................................................... 185%
55........................................................... 150%
60........................................................... 130%
65........................................................... 120%
70........................................................... 115%
75........................................................... 105%
80........................................................... 105%
85........................................................... 105%
90........................................................... 105%
95 and above................................................. 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
ILLUSTRATION OF OPTION 1
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt.
Under Option 1, a Certificate with a $50,000 Face Amount will generally have a
Death Benefit equal to $50,000. However, because the Death Benefit must be equal
to or greater than 250% of Certificate Value, if at any time the Certificate
Value exceeds $20,000, the Death Benefit will exceed the $50,000 Face Amount. In
this example, each additional dollar of Certificate Value above $20,000 will
increase the Death Benefit by $2.50. For example, a Certificate with a
Certificate Value of $35,000 will have a Minimum Death Benefit of $87,500
($35,000 X 2.50); Certificate Value of $40,000 will produce a Minimum Death
Benefit of $100,000 ($40,000 X 2.50); and Certificate Value of $50,000 will
produce a Minimum Death Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
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(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
ILLUSTRATION OF OPTION 2
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Minimum Death Benefit will be $87,500 ($35,000 X 2.50); Certificate
Value of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X
2.50); and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is less than the Face Amount plus
Certificate Value, then the Death Benefit will be the current Face Amount plus
Certificate Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
CHANGE IN DEATH BENEFIT OPTION
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of the request. No charges will be imposed on changes in Death Benefit Options.
IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Minimum Death Benefit). The
cost of insurance may be higher or lower than it otherwise would have been since
any increases or decreases in Certificate Value will, respectively, reduce or
increase the Insurance Amount at Risk under Option 1. Assuming a positive net
investment return with respect to any amounts in the Separate Account, changing
the Death Benefit Option from Option 2 to Option 1 will
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reduce the Insurance Amount at Risk and, therefore, the cost of insurance charge
for all subsequent Monthly Deductions, compared to what such charge would have
been if no such change were made. If the Death Benefit Option is changed from
Option 1 to Option 2, the Face Amount will be decreased to equal the Death
Benefit less the Certificate Value on the effective date of the change. This
change may not be made if it would result in a Face Amount less than $40,000. A
change from Option 1 to Option 2 will not alter the amount of the Death Benefit
at the time of the change, but will affect the determination of the Death
Benefit from that point on. Because the Certificate Value will be added to the
new specified Face Amount, the Death Benefit will vary with the Certificate
Value. Thus, under Option 2, the Insurance Amount at Risk will always equal the
Face Amount unless the Minimum Death Benefit is in effect. The cost of insurance
may also be higher or lower than it otherwise would have been without the change
in Death Benefit Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
INCREASES
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than an amount determined by the Company. This amount varies by
group but in no event will this amount exceed $10,000. You may not increase the
Face Amount after the Insured reaches Age 80. An increase must be accompanied by
an additional premium if the Certificate Value is less than $50 plus an amount
equal to the sum of two Monthly Deductions. On the effective date of each
increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. A surrender charge
will also be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and (2)
during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
DECREASES
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the
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<PAGE>
decrease may be limited or Certificate Value may be returned to the Certificate
Owner (at your election) to the extent necessary to meet the requirements. A
return of Certificate Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined.
Certificate Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the General Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Certificate.
CALCULATION OF CERTIFICATE VALUE
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
CERTIFICATE -- "Enrollment Form for a Certificate") less any Monthly Deductions
due. On each Valuation Date after the Date of Issue the Certificate Value will
be:
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
determined for each Sub-Account by multiplying the value of a Unit in that
Sub-Account on that date by the number of such Units allocated to the
Certificate; PLUS
(2) the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
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<PAGE>
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
THE UNIT
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any; and
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period.
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor.
Allocations to the General Account are not converted into Units, but are
credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
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SURRENDER
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PAID-UP INSURANCE OPTION
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING CERTIFICATE OWNER
RIGHTS AND BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit will be computed
differently from the net Death Benefit and the Death Benefit options will
not apply.
- We will not allow transfers of Certificate Value from the General Account
back to the Separate Account.
- You may not make further payments.
- You may not increase or decrease the Face Amount or make partial
withdrawals.
- Riders will continue only with our consent.
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
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PARTIAL WITHDRAWAL
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges On Partial Withdrawal." The Company will normally pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments." For important tax consequences which may result from partial
withdrawals, see FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. The
premium tax charge may change when either the applicable jurisdiction changes or
the tax rate within the applicable jurisdiction changes. The Company should be
notified of any change in address of the Insured as soon as possible.
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 10%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
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MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See THE CERTIFICATE -- "Charge
for Change in Face Amount."
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the Face Amount. Because the cost of insurance depends
upon a number of variables, it can vary from month to month and from group to
group.
CALCULATION OF THE CHARGE
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Minimum Death Benefit is not in effect.
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit Option
1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face
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Amount reduced by any Certificate Value (minus rider charges) in excess of the
initial Face Amount at the beginning of the Certificate month.
If the Minimum Death Benefit is in effect under any Option, a monthly cost of
insurance charge will also be calculated for that portion of the Death Benefit
which exceeds the current Face Amount. This charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Minimum Death Benefit (Certificate Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Certificate Value under Death
Benefit Option 1 or Option 3, or
- the Face Amount plus the Certificate Value under Death Benefit Option
2.
When the Minimum Death Benefit is in effect, the cost of insurance charge for
the initial Face Amount and for any increases will be calculated as set forth in
the preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: Decreases."
COST OF INSURANCE RATES
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a guaranteed
or simplified underwriting basis. The amount of this portion will be determined
for each group, and may vary based on characteristics within the group.
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; the number of
persons eligible to participate in the plan; expected percentage of eligible
persons participating in the plan; and the amount of guaranteed or simplified
underwriting insurance to be issued. Larger groups, higher participation rates
and occupations with historically favorable mortality rates will generally
result in the individuals within that group being placed in a more favorable
Underwriting Class.
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and
non-smokers. Any change in the cost of insurance rates will apply to all persons
of the same insuring Age and Underwriting Class whose Certificates have been in
force for the same length of time.
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will have a lower cost of insurance than an Insured in a standard Underwriting
Class who, in turn, will have a lower cost of insurance than an Insured in a
substandard Underwriting Class with a higher mortality risk. The Underwriting
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Classes may be divided into two categories or aggregated: smokers and
non-smokers. Non-smoking Insureds will incur lower cost of insurance rates than
Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts 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, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. 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 costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current 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.
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CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
Because the Sub-Accounts purchase shares of the Underlying Investment Companies,
the value of the Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Investment Companies. The
prospectuses and Statements of Additional Information of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO VIF and Morgan Stanley
contain additional information concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
SURRENDER CHARGE
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance of the Certificate is an amount up to the sum of (a) plus (b), where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of up to 50% (less
any premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. This reduction in the maximum
surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
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The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES, for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of
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withdrawal (i.e., 15 years have passed from the Date of Issue and from the
effective date of any increase in the Face Amount).
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
TRANSFER CHARGES
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund and Government Bond Fund of the Trust, respectively, to one or more
of the other Sub-Accounts, or (b) to reallocate Certificate Value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve free transfers allowed in each Certificate year. Each subsequent
automatic transfer is without charge and does not reduce the remaining number of
transfers which may be made without charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account will be free of charge, and in addition to the twelve free transfers in
a Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and
CERTIFICATE LOANS.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
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CERTIFICATE LOANS
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments."
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The current
credited rate is 7.1%, 8% for preferred loans. NO ADDITIONAL INTEREST WILL BE
CREDITED TO SUCH CERTIFICATE VALUE.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth Certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. The
Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the loan amount, if the new loan amount
exceeds the Certificate Value in the General Account, the Company will transfer
Certificate Value equal to that excess loan amount from the Certificate Value in
each Sub-Account to the General Account as security for the excess loan amount.
The Company will allocate the amount transferred among the Sub-Accounts in the
same proportion that the Certificate Value in each Sub-Account bears to the
total Certificate Value in all Sub-Accounts.
REPAYMENT OF DEBT
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate Account cannot exceed Certificate Value previously transferred from
the Separate Account to secure the Debt.
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If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
EFFECT OF CERTIFICATE LOANS
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
CERTIFICATE TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Certificate to lapse
unless:
- the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued; or
- if Debt exceeds the Certificate Value.
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
PAYOR PROVISIONS
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of premium which is due.
The premium may be paid during a grace period of 62 days, beginning on the
premium due date. If the necessary premium is not received by the Company within
31 days of the end of the grace period, a second notice will be sent to the
Payor. A 31-day grace period notice at this time will also be sent to you if the
Certificate Value is insufficient to cover the Monthly Deductions then due.
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If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
REINSTATEMENT
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
- a written enrollment form for reinstatement,
- Evidence of Insurability; and
- a premium that, after the deduction of the premium expense charge, is
large enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
CERTIFICATE VALUE ON REINSTATEMENT
The Certificate Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Certificate increased by interest
from the date the payment was received at the Principal Office; PLUS
- an amount equal to the Certificate Value less Debt on the date of default;
MINUS
- the Monthly Deduction due on the date of reinstatement. You may reinstate
any Debt outstanding on the date of default or foreclosure.
OTHER CERTIFICATE PROVISIONS
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
CERTIFICATE OWNER
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while
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the Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
is required whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
ASSIGNMENT
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
INCONTESTABILITY
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Certificate,
without interest, less any outstanding Debt and less any partial withdrawals. If
the Insured commits suicide, while sane or insane, within two years from the
effective date of any increase in the Death Benefit, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.
AGE
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers may be postponed whenever: (1) the New York
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Stock Exchange is closed other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the SEC,
or (2) an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the Separate Account's net assets.
Payments under the Certificate of any amounts derived from the premiums paid by
check may be delayed until such time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Assistant Secretary (since 1992),
Director and Vice President (since 1984) of First Allmerica
Abigail M. Armstrong Secretary (since 1996), and Counsel (since 1991) of
Secretary and Counsel First Allmerica
Robert E. Bruce Director and Chief Information Officer (since 1997),Vice
Director, Vice President and President (since 1995) of First Allmerica; Corporate
Chief Information Officer Manager (1979 to 1995) of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and
Director, Vice President and Vice President (since 1991) of First Allmerica
Chief Investment Officer
John F. Kelly Director (since 1996), General Counsel (since 1981),
Director, Vice President and Senior Vice President and Assistant Secretary (since
General Counsel 1986) of First Allmerica
J. Barry May Director and President (since 1996) of First Allmerica;
Director Vice President (1993 to 1996), and General Manager (1989
to 1993) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994), and CEO (since
1996) of Citizens Insurance Company of America; Vice
President (1982 to 1994) and Chief Investment Officer
(1986 to 1994) of First Allmerica
John F. O'Brien
Director and Chairman of the Director, Chairman of the Board, President and Chief
Board Executive Officer (since 1989) of First Allmerica
Edward J. Parry, III
Director, Vice President, Director and Chief Financial Officer (since 1996), and
Treasurer, Vice President and Treasurer (since 1993) of First
and Chief Financial Officer Allmerica
Richard M. Reilly Director (since 1996), Vice President (since 1990), of
Director, President and First Allmerica; Director (since 1990) of Allmerica
Chief Executive Officer Investments, Inc.; and Director and President (since
1990) of Allmerica Financial Investment Management
Services, Inc.
Eric A. Simonsen Director (since 1996), Vice President (since 1990), and
Director and Vice President Chief Financial Officer (1990 to 1996) of First
Allmerica
Phillip E. Soule Director (since 1996), and Vice President (since 1987)
Director of First Allmerica
</TABLE>
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DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Certificates pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer and is
a member of the National Association of Securities Dealers ("NASD"). The
Certificates are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc. or of independent broker-dealers.
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issuance of a
Certificate or an increase in Face Amount, commissions may be up to 25% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 2.5% of first-year,
or 4% of renewal premiums. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales related
criteria. Other payments may be made for other services that do not directly
involve the sales of the Certificates. These services may include the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity
VIP II Asset Manager 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
Separate Account. With respect to the T. Rowe Price International Stock
Portfolio and the Morgan Stanley Fixed Income 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 Separate 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.
REPORTS
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you.
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The annual statement will summarize all of the above transactions and deductions
of charges during the Certificate year. It will also set forth the status of the
Death Proceeds, Certificate Value, Surrender Value, amounts in the Sub-Accounts
and General Account, and any Certificate loan(s).
In addition, you will be sent periodic reports containing financial statements
and other information for the Separate Account and the Underlying Investment
Companies as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
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 from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, and the financial
statements for the Group VEL Account as of December 31, 1997 and for the periods
indicated, included in this Prospectus 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
Certificates.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax
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upon the earnings or realized capital gains attributable to the Separate
Account. Based on these expectations, no charge is made for federal income taxes
which may be attributable to the Separate Account.
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE CERTIFICATES
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See "Modified Endowment Contracts".
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
CERTIFICATE LOANS
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may revoke your
request for a preferred loan.
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Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax deduction for interest is allowed on policy or certificate loans, if the
insured is an officer or employee of, or is financially interested in, any
business carried on by the taxpayer. There is an exception to this rule which
permits a deduction for interest on loans up to $50,000 related to any policies
or certificates covering the greater of (1) five individuals, or (2) the lesser
of (a) 5% of the total number of officers and employees of the corporation, or
(b) 20 individuals.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level premiums.
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any 12-month period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the Certificate and the General
Account may, however, be subject to certain generally applicable provisions of
the Federal Securities Laws concerning the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
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GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General Account, plus interest at the
Guaranteed Minimum Rate, plus any excess interest which the Company credits,
less the sum of all Certificate charges allocable to the General Account and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
THE CERTIFICATE
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CERTIFICATE LOANS
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate. Partial withdrawals are made on a
last-in/first-out basis from Certificate Value allocated to the General Account.
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
Certificate loans may also be made from the Certificate Value in the General
Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
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FINANCIAL STATEMENTS
Financial Statements for the Company and for the Separate Account are included
in this Prospectus beginning immediately after this section. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account.
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APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. The following supplemental benefits are
available for issue under the Certificates for an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that, during periods of total disability continuing for
more than the period of time specified in the Rider, the Company will add to
the Certificate Value each month an amount selected by you or the amount
necessary to maintain the Certificate in force, whichever is greater. This
benefit is subject to the Company's maximum issue benefits. Its cost may
change yearly.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present, this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "Other
Insured" to convert the coverage to a flexible premium adjustable life
insurance Certificate.
CHILDREN'S INSURANCE RIDER
This Rider provides coverage for eligible minor children. It also covers
future children, including adopted children and stepchildren.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Certificate anniversary nearest the Insured's Age 70.
OPTION TO ACCELERATE BENEFITS RIDER
This Rider permits part of the proceeds of the Certificate to be available
before death if the Insured becomes terminally ill and, depending on the
group to which the Policy is issued, may also pay part of the proceeds if
the Insured is permanently confined to a nursing home.
EXCHANGE OPTION RIDER
This Rider allows you to use the Certificate to insure a different person,
subject to Company guidelines.
EXCHANGE TO TERM INSURANCE RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An
exchange credit will be paid to the Certificate Owner or the corporate
assignee in the case of a corporate-sponsored collateral assignment split
dollar arrangement.
CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL STATES.
A-1
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APPENDIX B
PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options then offered by the
Company. If you do not make an election, the Company will pay the benefits in a
single sum. A certificate will be provided to the payee describing the payment
option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that would otherwise be deducted from the Death Benefit.
The amounts payable under a payment option are paid from the General Account.
These amounts are not based on the investment experience of the Separate
Account.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
B-1
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Certificate's Sum Insured and
Certificate Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Certificate issued to a person, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Certificate
issued to a person, Age 45, under a standard Premium Class and qualifying for
the non-smoker discount. The tables illustrate the guaranteed cost of insurance
rates and the current cost of insurance rates as presently in effect.
The tables illustrate the Certificate Values that would result based upon the
assumptions that no Certificate loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Certificate year (so that no transaction or transfer charges have been
incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6% and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested each year to earn interest (after taxes) at 5%
compounded annually.
The Certificate Values and Death Proceeds would be different from those shown if
the gross annual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below such averages for individual
Certificate years. The values would also be different depending on the
allocation of a Certificate's total Certificate Value among the Sub-Accounts of
the Separate Account, if the actual rates of return averaged 0%, 6% or 12%, but
the rates of each Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Certificate Values take into
account the deduction from premium for the premium expense charge, the Monthly
Deduction from Certificate Value, and the daily charge against the Separate
Account for mortality and expense risks. In both the Current Cost of Insurance
Charges tables and the Guaranteed Cost of Insurance Charges tables, the Separate
Account charge for mortality and expense risks is equivalent to an effective
annual rate of 0.90% of the average daily value of the assets in the Separate
Account attributable to the Certificates.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary and, in 1997, ranged from an annual
rate of 0.35% to an annual rate of 2.00% of average daily net assets. The fees
and expenses associated with the Certificate may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of the Certificate Value
among the Sub-Accounts.
AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Growth Fund and Select Growth Fund, 1.10% for
the
C-1
<PAGE>
Select Growth and Income, 1.00% for the Investment Grade Income Fund and
Government Bond Fund, and 0.60% for the Money Market Fund and Equity Index Fund.
The total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1997. These limitations may be
terminated at any time.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-adviser. These limitations may be terminated at any time.
Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. In 1997, the actual ratio of total annual expenses of
the International Equity Series was 0.85%.
For the INVESCO VIF Industrial Income Fund and INVESCO VIF Total Return Fund of
INVESCO VIF, the ratio of total expenses, less expenses voluntarily absorbed by
the investment adviser, was 0.91% and 0.92%, respectively. If such expenses had
not been voluntarily absorbed, the total operating expenses would have been
0.97% and 1.10%, respectively.
For the Morgan Stanley Fixed Income Portfolio of Morgan Stanley Universal Funds,
Inc., the ratio of total expenses less expenses voluntarily absorbed by the
investment adviser, was 0.70%. If such expenses had not been voluntarily
absorbed, the total operating expenses would have been 1.71%.
NET ANNUAL RATES OF INVESTMENT
Taking into account the 0.90% charge to the Separate Account and the assumed
0.85% charge for Underlying Investment Company advisory fees and operating
expenses, the gross annual rates of investment return of 0%, 6% and 12%
correspond to net annual rates of (-1.75%), 4.25% and 10.25%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 117 3,502 250,000 346 3,731 250,000 575 3,960 250,000
2 9,041 3,060 6,914 250,000 3,738 7,591 250,000 4,443 8,297 250,000
3 13,903 8,104 10,236 250,000 9,454 11,585 250,000 10,917 13,048 250,000
4 19,008 12,398 13,464 250,000 14,650 15,715 250,000 17,189 18,254 250,000
5 24,368 16,601 16,601 250,000 19,987 19,987 250,000 23,963 23,963 250,000
6 29,996 19,644 19,644 250,000 24,405 24,405 250,000 30,225 30,225 250,000
7 35,906 22,587 22,587 250,000 28,967 28,967 250,000 37,092 37,092 250,000
8 42,112 25,431 25,431 250,000 33,682 33,682 250,000 44,631 44,631 250,000
9 48,627 28,174 28,174 250,000 38,554 38,554 250,000 52,913 52,913 250,000
10 55,469 30,814 30,814 250,000 43,587 43,587 250,000 62,015 62,015 250,000
11 62,652 33,346 33,346 250,000 48,784 48,784 250,000 72,024 72,024 250,000
12 70,195 35,735 35,735 250,000 54,122 54,122 250,000 83,013 83,013 250,000
13 78,114 37,977 37,977 250,000 59,604 59,604 250,000 95,092 95,092 250,000
14 86,430 40,076 40,076 250,000 65,244 65,244 250,000 108,392 108,392 250,000
15 95,161 42,024 42,024 250,000 71,043 71,043 250,000 123,054 123,054 250,000
16 104,330 43,806 43,806 250,000 77,002 77,002 250,000 139,236 139,236 250,000
17 113,956 45,448 45,448 250,000 83,155 83,155 250,000 157,139 157,139 250,000
18 124,064 46,935 46,935 250,000 89,504 89,504 250,000 176,971 176,971 250,000
19 134,677 48,253 48,253 250,000 96,054 96,054 250,000 198,970 198,970 250,000
20 145,821 49,388 49,388 250,000 102,813 102,813 250,000 223,318 223,318 272,448
Age 60 95,161 42,024 42,024 250,000 71,043 71,043 250,000 123,054 123,054 250,000
Age 65 145,821 49,388 49,388 250,000 102,813 102,813 250,000 223,318 223,318 272,448
Age 70 210,477 51,357 51,357 250,000 139,910 139,910 250,000 386,429 386,429 448,257
Age 75 292,995 44,916 44,916 250,000 184,625 184,625 250,000 649,162 649,162 694,604
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 2,753 250,000 0 2,946 250,000 0 3,139 250,000
2 9,041 1,553 5,406 250,000 2,111 5,964 250,000 2,693 6,547 250,000
3 13,903 5,826 7,957 250,000 6,924 9,055 250,000 8,117 10,248 250,000
4 19,008 9,333 10,399 250,000 11,149 12,214 250,000 13,202 14,267 250,000
5 24,368 12,732 12,732 250,000 15,444 15,444 250,000 18,638 18,638 250,000
6 29,996 14,953 14,953 250,000 18,742 18,742 250,000 23,393 23,393 250,000
7 35,906 17,049 17,049 250,000 22,098 22,098 250,000 28,561 28,561 250,000
8 42,112 19,010 19,010 250,000 25,507 25,507 250,000 34,180 34,180 250,000
9 48,627 20,825 20,825 250,000 28,957 28,957 250,000 40,290 40,290 250,000
10 55,469 22,479 22,479 250,000 32,437 32,437 250,000 46,932 46,932 250,000
11 62,652 23,964 23,964 250,000 35,942 35,942 250,000 54,164 54,164 250,000
12 70,195 25,271 25,271 250,000 39,464 39,464 250,000 62,049 62,049 250,000
13 78,114 26,389 26,389 250,000 42,996 42,996 250,000 70,660 70,660 250,000
14 86,430 27,311 27,311 250,000 46,535 46,535 250,000 80,085 80,085 250,000
15 95,161 28,024 28,024 250,000 50,072 50,072 250,000 90,419 90,419 250,000
16 104,330 28,499 28,499 250,000 53,585 53,585 250,000 101,765 101,765 250,000
17 113,956 28,715 28,715 250,000 57,058 57,058 250,000 114,248 114,248 250,000
18 124,064 28,633 28,633 250,000 60,461 60,461 250,000 128,007 128,007 250,000
19 134,677 28,203 28,203 250,000 63,756 63,756 250,000 143,205 143,205 250,000
20 145,821 27,381 27,381 250,000 66,909 66,909 250,000 160,046 160,046 250,000
Age 60 95,161 28,024 28,024 250,000 50,072 50,072 250,000 90,419 90,419 250,000
Age 65 145,821 27,381 27,381 250,000 66,909 66,909 250,000 160,046 160,046 250,000
Age 70 210,477 15,839 15,839 250,000 79,494 79,494 250,000 277,046 277,046 321,374
Age 75 292,995 0 0 0 81,287 81,287 250,000 465,877 465,877 498,488
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 297 1,221 76,221 375 1,299 76,299 453 1,377 76,377
2 3,014 1,370 2,420 77,420 1,602 2,652 77,652 1,844 2,894 77,894
3 4,634 3,107 3,596 78,596 3,572 4,062 79,062 4,076 4,566 79,566
4 6,336 4,505 4,750 79,750 5,284 5,529 80,529 6,162 6,406 81,406
5 8,123 5,881 5,881 80,881 7,055 7,055 82,055 8,432 8,432 83,432
6 9,999 6,989 6,989 81,989 8,644 8,644 83,644 10,663 10,663 85,663
7 11,969 8,073 8,073 83,073 10,296 10,296 85,296 13,118 13,118 88,118
8 14,037 9,135 9,135 84,135 12,013 12,013 87,013 15,820 15,820 90,820
9 16,209 10,172 10,172 85,172 13,798 13,798 88,798 18,793 18,793 93,793
10 18,490 11,185 11,185 86,185 15,653 15,653 90,653 22,064 22,064 97,064
11 20,884 12,174 12,174 87,174 17,579 17,579 92,579 25,664 25,664 100,664
12 23,398 13,138 13,138 88,138 19,580 19,580 94,580 29,625 29,625 104,625
13 26,038 14,077 14,077 89,077 21,658 21,658 96,658 33,983 33,983 108,983
14 28,810 14,991 14,991 89,991 23,814 23,814 98,814 38,779 38,779 113,779
15 31,720 15,881 15,881 90,881 26,054 26,054 101,054 44,057 44,057 119,057
16 34,777 16,744 16,744 91,744 28,377 28,377 103,377 49,865 49,865 124,865
17 37,985 17,581 17,581 92,581 30,789 30,789 105,789 56,256 56,256 131,256
18 41,355 18,391 18,391 93,391 33,290 33,290 108,290 63,290 63,290 138,290
19 44,892 19,174 19,174 94,174 35,884 35,884 110,884 71,031 71,031 146,031
20 48,607 19,930 19,930 94,930 38,574 38,574 113,574 79,550 79,550 154,550
Age 60 97,665 25,579 25,579 100,579 71,167 71,167 146,167 229,232 229,232 307,170
Age 65 132,771 26,546 26,546 101,546 91,516 91,516 166,516 378,078 378,078 461,255
Age 70 177,576 25,538 25,538 100,538 114,403 114,403 189,403 617,130 617,130 715,870
Age 75 234,759 21,566 21,566 96,566 139,063 139,063 214,063 1,001,956 1,001,956 1,076,956
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 116 1,040 76,040 184 1,108 76,108 252 1,176 76,176
2 3,014 1,010 2,060 77,060 1,211 2,261 77,261 1,421 2,471 77,471
3 4,634 2,570 3,059 78,059 2,971 3,461 78,461 3,407 3,896 78,896
4 6,336 3,794 4,038 79,038 4,464 4,709 79,709 5,219 5,464 80,464
5 8,123 4,994 4,994 79,994 6,003 6,003 81,003 7,186 7,186 82,186
6 9,999 5,929 5,929 80,929 7,348 7,348 82,348 9,080 9,080 84,080
7 11,969 6,841 6,841 81,841 8,743 8,743 83,743 11,161 11,161 86,161
8 14,037 7,729 7,729 82,729 10,190 10,190 85,190 13,448 13,448 88,448
9 16,209 8,592 8,592 83,592 11,688 11,688 86,688 15,958 15,958 90,958
10 18,490 9,430 9,430 84,430 13,239 13,239 88,239 18,715 18,715 93,715
11 20,884 10,242 10,242 85,242 14,845 14,845 89,845 21,742 21,742 96,742
12 23,398 11,026 11,026 86,026 16,505 16,505 91,505 25,066 25,066 100,066
13 26,038 11,784 11,784 86,784 18,222 18,222 93,222 28,716 28,716 103,716
14 28,810 12,512 12,512 87,512 19,996 19,996 94,996 32,724 32,724 107,724
15 31,720 13,214 13,214 88,214 21,830 21,830 96,830 37,127 37,127 112,127
16 34,777 13,884 13,884 88,884 23,723 23,723 98,723 41,962 41,962 116,962
17 37,985 14,524 14,524 89,524 25,678 25,678 100,678 47,272 47,272 122,272
18 41,355 15,132 15,132 90,132 27,694 27,694 102,694 53,105 53,105 128,105
19 44,892 15,707 15,707 90,707 29,772 29,772 104,772 59,511 59,511 134,511
20 48,607 16,248 16,248 91,248 31,914 31,914 106,914 66,549 66,549 141,549
Age 60 97,665 19,035 19,035 94,035 56,455 56,455 131,455 188,542 188,542 263,542
Age 65 132,771 17,687 17,687 92,687 70,077 70,077 145,077 308,053 308,053 383,053
Age 70 177,576 12,953 12,953 87,953 82,821 82,821 157,821 498,045 498,045 577,733
Age 75 234,759 2,812 2,812 77,812 91,847 91,847 166,847 799,735 799,735 874,735
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 7,819 12,101 250,000 8,573 12,855 250,000 9,328 13,610 250,000
2 28,327 18,514 23,981 250,000 20,783 26,249 250,000 23,142 28,608 250,000
3 43,561 33,511 35,643 250,000 38,075 40,206 250,000 43,012 45,144 250,000
4 59,557 46,024 47,090 250,000 53,687 54,753 250,000 62,312 63,378 250,000
5 76,353 58,328 58,328 250,000 69,919 69,919 250,000 83,496 83,496 250,000
6 93,989 69,361 69,361 250,000 85,735 85,735 250,000 105,644 105,644 283,126
7 112,506 80,190 80,190 250,000 102,199 102,199 265,718 129,927 129,927 337,810
8 131,950 90,823 90,823 250,000 119,264 119,264 300,544 156,548 156,548 394,500
9 152,365 101,260 101,260 250,000 136,947 136,947 334,151 185,727 185,727 453,174
10 173,801 111,447 111,447 264,129 155,263 155,263 367,972 217,698 217,698 515,944
11 196,309 121,383 121,383 279,180 174,227 174,227 400,723 252,718 252,718 581,252
12 219,943 131,047 131,047 292,234 193,825 193,825 432,230 291,020 291,020 648,976
13 244,758 140,443 140,443 303,356 214,070 214,070 462,391 332,900 332,900 719,063
14 270,814 149,574 149,574 314,106 234,979 234,979 493,456 378,681 378,681 795,230
15 298,173 158,442 158,442 323,221 256,560 256,560 523,383 428,705 428,705 874,558
16 326,899 167,034 167,034 332,397 278,806 278,806 554,824 483,309 483,309 961,786
17 357,062 175,392 175,392 338,506 301,792 301,792 582,459 543,013 543,013 1,048,014
18 388,733 183,504 183,504 344,988 325,512 325,512 611,962 608,230 608,230 1,143,473
19 421,988 191,373 191,373 350,212 349,978 349,978 640,460 679,448 679,448 1,243,390
20 456,905 199,001 199,001 354,222 375,208 375,208 667,870 757,203 757,203 1,347,822
Age 60 298,173 158,442 158,442 323,221 256,560 256,560 523,383 428,705 428,705 874,558
Age 65 456,905 199,001 199,001 354,222 375,208 375,208 667,870 757,203 757,203 1,347,822
Age 70 659,493 233,170 233,170 368,408 512,264 512,264 809,378 1,263,379 1,263,379 1,996,139
Age 75 918,052 261,171 261,171 370,863 668,454 668,454 949,205 2,035,561 2,035,561 2,890,497
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 6,199 10,481 250,000 6,864 11,146 250,000 7,529 11,811 250,000
2 28,327 15,289 20,755 250,000 17,279 22,745 250,000 19,349 24,815 250,000
3 43,561 28,696 30,827 250,000 32,688 34,820 250,000 37,011 39,142 250,000
4 59,557 39,630 40,695 250,000 46,325 47,391 250,000 53,867 54,933 250,000
5 76,353 50,367 50,367 250,000 60,487 60,487 250,000 72,352 72,352 250,000
6 93,989 59,846 59,846 250,000 74,136 74,136 250,000 91,581 91,581 250,000
7 112,506 69,129 69,129 250,000 88,363 88,363 250,000 112,659 112,659 292,913
8 131,950 78,216 78,216 250,000 103,169 103,169 259,985 135,664 135,664 341,873
9 152,365 87,108 87,108 250,000 118,432 118,432 288,973 160,757 160,757 392,246
10 173,801 95,804 95,804 250,000 134,145 134,145 317,924 188,095 188,095 445,786
11 196,309 104,310 104,310 250,000 150,314 150,314 345,721 217,869 217,869 501,098
12 219,943 112,590 112,590 251,075 166,942 166,942 372,281 250,279 250,279 558,122
13 244,758 120,601 120,601 260,497 184,038 184,038 397,522 285,551 285,551 616,791
14 270,814 128,339 128,339 269,512 201,596 201,596 423,351 323,907 323,907 680,204
15 298,173 135,810 135,810 277,053 219,621 219,621 448,027 365,602 365,602 745,828
16 326,899 142,995 142,995 284,560 238,081 238,081 473,781 410,847 410,847 817,585
17 357,062 149,915 149,915 289,336 257,002 257,002 496,013 459,970 459,970 887,742
18 388,733 156,546 156,546 294,306 276,338 276,338 519,516 513,195 513,195 964,807
19 421,988 162,882 162,882 298,073 296,065 296,065 541,800 570,795 570,795 1,044,555
20 456,905 168,923 168,923 300,683 316,170 316,170 562,783 633,082 633,082 1,126,886
Age 60 298,173 135,810 135,810 277,053 219,621 219,621 448,027 365,602 365,602 745,828
Age 65 456,905 168,923 168,923 300,683 316,170 316,170 562,783 633,082 633,082 1,126,886
Age 70 659,493 194,665 194,665 307,570 421,521 421,521 666,003 1,026,306 1,026,306 1,621,563
Age 75 918,052 213,176 213,176 302,710 532,761 532,761 756,520 1,591,643 1,591,643 2,260,133
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD
BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED
0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-8
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge may be calculated upon issuance of the Certificate
and upon each increase in the Face Amount. The maximum surrender charge
calculated upon issuance of the Certificate is equal to $8.50 per thousand
dollars of the initial Face Amount plus up to 50% (less any premium expense
charge not associated with state and local premium taxes) of the Guideline
Annual Premium, depending on the group to which the Policy is issued. The
maximum surrender charge for an increase in the Face Amount is $8.50 per
thousand dollars of increase, plus up to 50% (less any premium expense charge
not associated with state and local premium taxes) of the Guideline Annual
Premium for the increase. The calculation may be summarized in the following
formula:
Maximum Surrender Charge = (8.5 X Face Amount) + (up to 50% X Guideline Annual
Premium)
1000
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Certificate and upon
each increase in the Face Amount are shown in the following table. During the
first two Certificate years following issue or an increase in Face Amount, the
actual surrender charge may be less than the maximum. See "CHARGES AND
DEDUCTIONS -- "Surrender Charge."
The maximum surrender charge remains level for up to the first 24 Certificate
months, reduces uniformly for the balance of the surrender charge period, and is
zero thereafter. The actual surrender charge imposed may be less than the
maximum.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Underwriting Class as indicated in the following table.
D-1
<PAGE>
MAXIMUM SURRENDER CHARGE PER $1000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at
Issue or Unisex Unisex Unisex
Increase Non-smoker Smoker Uni-smoker
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
0 14.89 14.37
1 14.84 14.31
2 15.00 14.44
3 15.17 14.58
4 15.35 14.73
5 15.53 14.88
6 15.73 15.05
7 15.94 15.23
8 16.16 15.41
9 16.39 15.61
10 16.64 15.82
11 16.91 16.05
12 17.18 16.28
13 17.47 16.52
14 17.77 16.77
15 18.08 17.02
16 18.38 17.28
17 18.67 17.54
18 17.15 18.98 17.80
19 17.40 19.29 18.07
20 17.65 19.62 18.35
21 17.92 19.95 18.64
22 18.20 20.31 18.95
23 18.49 20.68 19.27
24 18.80 21.08 19.61
25 19.13 21.49 19.97
26 19.48 21.94 20.35
27 19.85 22.42 20.75
28 20.24 22.92 21.18
29 20.65 23.45 21.63
30 21.08 24.02 22.11
31 21.54 24.62 22.61
32 22.03 25.25 23.15
33 22.54 25.92 23.71
34 23.03 26.62 24.30
35 23.64 27.36 24.92
36 24.24 28.15 25.57
37 24.87 28.97 26.26
38 25.53 29.84 26.99
39 26.23 30.76 27.75
40 26.97 31.72 28.55
41 27.74 32.73 29.39
42 28.55 33.79 30.27
43 29.41 34.91 31.19
44 30.31 36.08 32.17
45 31.26 37.31 33.19
46 32.27 38.60 34.27
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
Age at
Issue or Unisex Unisex Unisex
Increase Non-smoker Smoker Uni-smoker
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
47 33.33 39.95 35.40
48 34.46 41.38 36.59
49 35.64 42.89 37.86
50 36.90 44.48 39.19
51 38.24 46.17 40.60
52 39.66 47.95 42.10
53 41.17 49.84 43.68
54 42.76 51.82 45.36
55 44.46 53.91 47.12
56 46.25 56.11 48.98
57 48.16 56.87 50.95
58 50.18 56.76 53.03
59 52.34 56.65 55.24
60 54.64 56.54 56.71
61 56.54 56.44 56.59
62 56.41 56.34 56.47
63 56.29 56.26 56.36
64 56.16 56.18 56.25
65 56.03 56.10 56.13
66 55.90 56.01 56.00
67 55.74 55.90 55.85
68 55.58 55.76 55.70
69 55.41 55.63 55.53
70 55.27 55.49 55.37
71 55.12 55.38 55.22
72 54.96 55.29 55.10
73 54.85 55.23 54.99
74 54.75 55.19 54.89
75 54.64 55.16 54.80
76 54.52 55.10 54.69
77 54.36 55.01 54.53
78 54.18 54.86 54.35
79 53.97 54.68 54.14
80 53.75 54.49 53.91
</TABLE>
D-3
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a unisex, Age 35 non-smoker
purchases a $100,000 Certificate. In this example the Guideline Annual Premium
("GAP") equals $1,032.25. The maximum surrender charge is calculated as follows:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $516.13
(50% X GAP)
------------
$1,366.13
Maximum surrender charge per Table (23.64 X 100) $2,364.00
During the first two Certificate years after the Date of Issue, the actual
surrender charge is the smaller of the maximum surrender charge and the
following sum:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(not to exceed 30% of premiums received, up to one
GAP, plus 9% of premiums
received in excess of one GAP)
--------------------
Sum of (1) and (2)
The maximum surrender charge is $1,366.13. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
EXAMPLE 1:
Assume the Certificate Owner surrenders the Certificate in the 10th Certificate
month, having paid total premiums of $900. The actual surrender charge would be
$1,120.
EXAMPLE 2:
Assume the Certificate Owner surrenders the Certificate in the 120th Certificate
month. Also assume that after the 24th Certificate month, the maximum surrender
charge decreases by 1/156 per month, thereby reaching zero at the end of the
15th Certificate year. In this example, the maximum surrender charge would be
$525.43.
D-4
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity 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 Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- ------- -------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
------- -------
Total revenues......................... 403.5 377.9
------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
------- -------
Total benefits, losses and expenses.... 345.8 329.1
------- -------
Income before federal income taxes............. 57.7 48.8
------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
------- -------
Total federal income tax expense....... 21.0 17.1
------- -------
Net income..................................... $ 36.7 $ 31.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT 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
$1,340.5 and $1,660.2)............................ $ 1,402.5 $ 1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ---------
Total investments............................... 1,857.1 2,126.8
---------- ---------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ---------
Total assets.................................... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,097.3 $ 2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ---------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ---------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ---------
Total liabilities............................... 9,875.8 6,884.0
---------- ---------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ---------
Total shareholder's equity...................... 641.0 545.7
---------- ---------
Total liabilities and shareholder's equity...... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT 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
----------------------------------------------- ------- -------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
------- -------
Balance at end of period................... 2.5 2.5
------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
------- -------
Balance at end of period................... 386.9 346.3
------- -------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
------- -------
Balance at end of period................... 213.1 176.4
------- -------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
------- -------
Balance at end of period................... 38.5 20.5
------- -------
Total shareholder's equity............. $ 641.0 $ 545.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8)
Payment related to cession of
disability income business........ (207.0) --
Change in deferred acquisition
costs............................. (181.3) (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2)
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4) (39.9)
Change in reinsurance receivable.... 22.1 (1.5)
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5) (0.2)
-------- --------
Net used in operating
activities.................... (343.3) (35.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7) (795.8)
Purchase of equity securities........... (3.2) (13.2)
Purchase of other investments........... (79.4) (36.2)
Other investing activities, net......... -- (2.0)
-------- --------
Net cash provided by investing
activities........................ 336.4 15.1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
-------- --------
Net cash provided by financing
activities........................ 19.2 22.0
-------- --------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
-------- --------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
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. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. 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.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
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
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
C. 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, and investment and loan
commitments. 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.
D. 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.
E. 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.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized 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 product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. 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.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. 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. 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. Individual health benefit liabilities for
active lives are estimated using the net level premium method, and assumptions
as to future morbidity, withdrawals and interest which provide a margin for
adverse deviation. Benefit liabilities for disabled lives are estimated using
the present value of benefits method and experience assumptions as to claim
terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual 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 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.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual 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 and group variable 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 benefits 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.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and 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. Allmerica P&C 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, Allmerica P&C 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.
J. 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.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT TRANSACTIONS
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.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
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.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of 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....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these 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 $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
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..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</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............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ----- ------
9.4 8.6 18.0
---------- ----- ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ----- ------
(7.7) 4.4 (3.3)
---------- ----- ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 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 $15.7 million were written down to the estimated fair value
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
less cost to sell of $12.0 million, and a net realized investment loss of $3.7
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, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. 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........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 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.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- --- --- -----
Total................................................... $ 11.2 $ 4.8 $ 6.6 $ 9.4
----- --- --- -----
----- --- --- -----
1996
Mortgage loans.............................................. $ 12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- --- --- -----
Total................................................... $ 14.6 $ 4.5 $ 7.9 $ 11.2
----- --- --- -----
----- --- --- -----
</TABLE>
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 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 $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- ------
Net investment income....................................... $164.2 $171.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities 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
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- ------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- ------
---------- ------
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
F-15
<PAGE>
NOTES TO 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................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- --------- --------- ---------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- --------- --------- ---------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
7. 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 statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $ 21.0 $ 17.1
----- -----
----- -----
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
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 life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. 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.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
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
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
aforementioned threshold, from a source other than statutory earned surplus
would also require the prior approval of the Delaware Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- ------
Net premiums................................................ $ 22.8 $ 32.7
---------- ------
---------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- ------
---------- ------
</TABLE>
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- ------
Balance at end of year...................................... $765.3 $632.7
---------- ------
---------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. 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
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. 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 Allmerica Financial
Corp. 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
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 the 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.
The Company has been named a defendant in various 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 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.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. 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.
14. STATUTORY FINANCIAL INFORMATION
The Company is 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,
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
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- ------
---------- ------
</TABLE>
15. EVENT 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 refiled the 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, AFC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation, of which $21.0 million was apportioned to AFLIAC. 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.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the Group VEL Account of Allmerica Financial Life
Insurance and Annuity 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
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth and Income, Select Value Opportunity,
Select International Equity, Select Capital Appreciation, Fidelity VIP High
Income, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas,
Fidelity VIP II Asset Manager, T. Rowe Price International Stock, DGPF
International Equity, INVESCO Industrial Income, INVESCO Total Return, and
Morgan Stanley Fixed Income) constituting the Group VEL Account of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997, the results
of each of their operations and the changes in each of their net assets for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity 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>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT EQUITY
GROWTH GRADE INCOME MONEY MARKET INDEX GOVERNMENT BOND
----------- ------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $1,775,306 $9,844,560 $28,500,493 $8,543,950 $ 39,610
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... 8 55 -- -- --
----------- ------------ -------------- ----------- ---------------
Total assets.............................. 1,775,314 9,844,615 28,500,493 8,543,950 39,610
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- 29 50 --
----------- ------------ -------------- ----------- ---------------
Net assets................................ $1,775,314 $9,844,615 $28,500,464 $8,543,900 $ 39,610
----------- ------------ -------------- ----------- ---------------
----------- ------------ -------------- ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $1,775,314 $9,844,364 $28,500,464 $8,543,900 $ 39,610
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- 251 -- -- --
----------- ------------ -------------- ----------- ---------------
$1,775,314 $9,844,615 $28,500,464 $8,543,900 $ 39,610
----------- ------------ -------------- ----------- ---------------
----------- ------------ -------------- ----------- ---------------
Units outstanding, December 31, 1997...... 987,111 7,835,199 24,839,712 4,357,081 33,062
Net asset value per unit, December 31,
1997.................................... $ 1.798494 $1.256428 $ 1.147375 $1.960923 $1.197968
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
----------------- -------------
<S> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 239,055 $6,982,157
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- --
----------------- -------------
Total assets.............................. 239,055 6,982,157
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- 50
----------------- -------------
Net assets................................ $ 239,055 $6,982,107
----------------- -------------
----------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 239,055 $6,982,107
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- --
----------------- -------------
$ 239,055 $6,982,107
----------------- -------------
----------------- -------------
Units outstanding, December 31, 1997...... 136,320 3,619,339
Net asset value per unit, December 31,
1997.................................... $1.753627 $1.929111
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT SELECT
GROWTH AND SELECT VALUE INTERNATIONAL CAPITAL FIDELITY VIP
INCOME OPPORTUNITY* EQUITY APPRECIATION HIGH INCOME
----------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- 43,429
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Total assets.............................. 172,162 235,034 5,636,826 65,385 43,429
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Net assets................................ $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
$ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Units outstanding, December 31, 1997...... 96,017 132,435 3,907,238 37,757 29,272
Net asset value per unit, December 31,
1997.................................... $1.793040 $1.774701 $1.442663 $1.731741 $1.483642
<CAPTION>
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH
----------------- -------------
<S> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 58,981 345,559
Investment in shares of T. Rowe Price
International Series, Inc................. -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- --
----------------- -------------
Total assets.............................. 58,981 345,559
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- --
----------------- -------------
Net assets................................ $ 58,981 $ 345,559
----------------- -------------
----------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 58,981 $ 345,559
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- --
----------------- -------------
$ 58,981 $ 345,559
----------------- -------------
----------------- -------------
Units outstanding, December 31, 1997...... 33,578 195,934
Net asset value per unit, December 31,
1997.................................... $1.756503 $1.763675
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE DGPF
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK INTERNATIONAL EQUITY
------------ --------------- ------------------- --------------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 50,771 371,439 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- 97,829 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- 82,633
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- -- --
------------ --------------- ---------- ----------
Total assets.............................. 50,771 371,439 97,829 82,633
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- -- --
------------ --------------- ---------- ----------
Net assets................................ $ 50,771 $ 371,439 $ 97,829 $ 82,633
------------ --------------- ---------- ----------
------------ --------------- ---------- ----------
Net asset distribution by category:
Variable life policies.................... $ 50,771 $ 371,439 $ 97,829 $ 82,633
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- -- --
------------ --------------- ---------- ----------
$ 50,771 $ 371,439 $ 97,829 $ 82,633
------------ --------------- ---------- ----------
------------ --------------- ---------- ----------
Units outstanding, December 31, 1997...... 37,389 238,988 85,092 70,825
Net asset value per unit, December 31,
1997.................................... $1.357915 $1.554217 $1.149677 $1.166687
<CAPTION>
INVESCO INVESCO MORGAN STANLEY
INDUSTRIAL INCOME TOTAL RETURN FIXED INCOME(a)
----------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... 7,211 50,225 --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- --
----------------- ----------------- ---------------
Total assets.............................. 7,211 50,225 --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- --
----------------- ----------------- ---------------
Net assets................................ $ 7,211 $ 50,225 $ --
----------------- ----------------- ---------------
----------------- ----------------- ---------------
Net asset distribution by category:
Variable life policies.................... $ 7,211 $ 50,225 $ --
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- --
----------------- ----------------- ---------------
$ 7,211 $ 50,225 $ --
----------------- ----------------- ---------------
----------------- ----------------- ---------------
Units outstanding, December 31, 1997...... 5,168 38,284 --
Net asset value per unit, December 31,
1997.................................... $1.395217 $1.311904 $1.000000
</TABLE>
(a) For the period ended 12/31/97, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
-------------------- TO --------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
--------- --------- --------- --------- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 19,495 $ 2,650 $ 4 $ 611,287 $14 $11
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 6,270 1,681 -- 61,160 -- --
--------- --------- --- --------- ---- ---
Net investment income
(loss).................. 13,225 969 4 550,127 14 11
--------- --------- --- --------- ---- ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 282,628 51,596 18 -- -- --
Net realized gain (loss)
from sales of
investments............. 22,096 35 -- 7,069 -- --
--------- --------- --- --------- ---- ---
Net realized gain
(loss)................ 304,724 51,631 18 7,069 -- --
Net unrealized gain
(loss).................. (57,127) (33,389) 17 282,868 (6) 11
--------- --------- --- --------- ---- ---
Net realized and
unrealized gain
(loss)................ 247,597 18,242 35 289,937 (6) 11
--------- --------- --- --------- ---- ---
Net increase (decrease)
in net assets from
operations............ $ 260,822 $ 19,211 $39 $ 840,064 $ 8 $22
--------- --------- --- --------- ---- ---
--------- --------- --- --------- ---- ---
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------ 5/1/95** ------------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
--------- ------- -------------- ----------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 168,681 $ 2,028 $ 7 $ 99,982 $ 29 $ 1
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 24,667 683 -- 49,283 7 --
--------- ------- ----- ----------- ------ ---
Net investment income
(loss).................. 144,014 1,345 7 50,699 22 1
--------- ------- ----- ----------- ------ ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 231,984 94 16
Net realized gain (loss)
from sales of
investments............. -- -- -- 57,606 128 --
--------- ------- ----- ----------- ------ ---
Net realized gain
(loss)................ -- -- -- 289,590 222 16
Net unrealized gain
(loss).................. -- -- -- 1,759,333 (123) 25
--------- ------- ----- ----------- ------ ---
Net realized and
unrealized gain
(loss)................ -- -- -- 2,048,923 99 41
--------- ------- ----- ----------- ------ ---
Net increase (decrease)
in net assets from
operations............ $ 144,014 $ 1,345 $ 7 $ 2,099,622 $ 121 $42
--------- ------- ----- ----------- ------ ---
--------- ------- ----- ----------- ------ ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
FOR THE SELECT AGGRESSIVE GROWTH
YEAR ENDED FOR THE FOR THE
DECEMBER PERIOD YEAR ENDED FOR THE
31, 5/1/95** DECEMBER 31, PERIOD
----------- TO ---------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----- ---- --------- -------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $837 $57 $ 9 $ -- $ -- $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 19 8 -- 706 10 --
----- ---- --- -------- ------ -----
Net investment income
(loss).................. 818 49 9 (706) (10) --
----- ---- --- -------- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 17,916 464 --
Net realized gain (loss)
from sales of
investments............. 1 5 -- 748 182 --
----- ---- --- -------- ------ -----
Net realized gain
(loss)................ 1 5 -- 18,664 646 --
Net unrealized gain
(loss).................. (88) (2) 7 3,863 (425) 49
----- ---- --- -------- ------ -----
Net realized and
unrealized gain
(loss)................ (87) 3 7 22,527 221 49
----- ---- --- -------- ------ -----
Net increase (decrease)
in net assets from
operations............ $731 $52 $16 $ 21,821 $ 211 $ 49
----- ---- --- -------- ------ -----
----- ---- --- -------- ------ -----
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------- 5/1/95** ---------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
----------- ------ -------------- -------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 20,160 $ 5 $ -- $ 1,134 $ 10 $ 2
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 39,740 2 -- 365 2 --
----------- ------ ----- -------- ------ ---
Net investment income
(loss).................. (19,580) 3 -- 769 8 2
----------- ------ ----- -------- ------ ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 363,902 233 -- 13,936 143 9
Net realized gain (loss)
from sales of
investments............. 51,101 92 -- 296 63 --
----------- ------ ----- -------- ------ ---
Net realized gain
(loss)................ 415,003 325 -- 14,232 206 9
Net unrealized gain
(loss).................. 1,431,596 (229) 37 (5,403) (126) 30
----------- ------ ----- -------- ------ ---
Net realized and
unrealized gain
(loss)................ 1,846,599 96 37 8,829 80 39
----------- ------ ----- -------- ------ ---
Net increase (decrease)
in net assets from
operations............ $ 1,827,019 $ 99 $ 37 $ 9,598 $ 88 $41
----------- ------ ----- -------- ------ ---
----------- ------ ----- -------- ------ ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
--------------- TO ------------------ 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
-------- ----- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 1,289 $ 40 $ 1 $ 131,715 $ 1,124 $ 2
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 633 19 -- 35,909 119 --
-------- ----- --- --------- ------- ---
Net investment income
(loss).................. 656 21 1 95,806 1,005 2
-------- ----- --- --------- ------- ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 30,900 252 6 182,156 136 1
Net realized gain (loss)
from sales of
investments............. 700 142 -- 11,256 70 --
-------- ----- --- --------- ------- ---
Net realized gain
(loss)................ 31,600 394 6 193,412 206 1
Net unrealized gain
(loss).................. (5,610) 195 14 (15,069) 3,759 23
-------- ----- --- --------- ------- ---
Net realized and
unrealized gain
(loss)................ 25,990 589 20 178,343 3,965 24
-------- ----- --- --------- ------- ---
Net increase (decrease)
in net assets from
operations............ $ 26,646 $ 610 $21 $ 274,149 $ 4,970 $26
-------- ----- --- --------- ------- ---
-------- ----- --- --------- ------- ---
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
--------------- 5/1/95** --------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------ -------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ -- $ -- $ 5 $ 351 $ 19 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 204 58 -- 119 5 --
------- ------ --- ------- ------ -----
Net investment income
(loss).................. (204) (58) 5 232 14 --
------- ------ --- ------- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- 28 -- 43 4 --
Net realized gain (loss)
from sales of
investments............. 544 53 -- 94 42 --
------- ------ --- ------- ------ -----
Net realized gain
(loss)................ 544 81 -- 137 46 --
Net unrealized gain
(loss).................. 6,529 (147) 74 2,892 66 21
------- ------ --- ------- ------ -----
Net realized and
unrealized gain
(loss)................ 7,073 (66) 74 3,029 112 21
------- ------ --- ------- ------ -----
Net increase (decrease)
in net assets from
operations............ $ 6,869 $ (124) $ 79 $ 3,261 $ 126 $ 21
------- ------ --- ------- ------ -----
------- ------ --- ------- ------ -----
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP
EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
-------------- TO ----------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
------- ----- --------- -------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 91 $ 1 $ 4 $ 2,224 $ 1 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 177 7 -- 1,311 832 --
------- ----- --- -------- ------- -----
Net investment income
(loss).................. (86) (6) 4 913 (831) --
------- ----- --- -------- ------- -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 457 16 -- 9,956 21 --
Net realized gain (loss)
from sales of
investments............. 242 68 -- 16,498 151 --
------- ----- --- -------- ------- -----
Net realized gain
(loss)................ 699 84 -- 26,454 172 --
Net unrealized gain
(loss).................. 5,483 87 36 43,944 2,233 48
------- ----- --- -------- ------- -----
Net realized and
unrealized gain
(loss)................ 6,182 171 36 70,398 2,405 48
------- ----- --- -------- ------- -----
Net increase (decrease)
in net assets from
operations............ $ 6,096 $165 $40 $ 71,311 $ 1,574 $ 48
------- ----- --- -------- ------- -----
------- ----- --- -------- ------- -----
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
---------------- 5/1/95** ----------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- -------------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 344 $ 3 $ -- $ 6,739 $ 10 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 205 76 -- 994 501 --
------- ------- ----- -------- ------- -----
Net investment income
(loss).................. 139 (73) -- 5,745 (491) --
------- ------- ----- -------- ------- -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,365 3 -- 16,905 8 --
Net realized gain (loss)
from sales of
investments............. 201 138 -- 499 130 --
------- ------- ----- -------- ------- -----
Net realized gain
(loss)................ 1,566 141 -- 17,404 138 --
Net unrealized gain
(loss).................. 285 1,222 15 28,899 7,451 25
------- ------- ----- -------- ------- -----
Net realized and
unrealized gain
(loss)................ 1,851 1,363 15 46,303 7,589 25
------- ------- ----- -------- ------- -----
Net increase (decrease)
in net assets from
operations............ $ 1,990 $ 1,290 $ 15 $ 52,048 $ 7,098 $ 25
------- ------- ----- -------- ------- -----
------- ------- ----- -------- ------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK FOR THE DGPF INTERNATIONAL EQUITY INVESCO INDUSTRIAL INCOME
FOR THE PERIOD FOR THE FOR THE FOR THE FOR THE
YEAR ENDED 2/9/96** YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, TO DECEMBER 31, 7/2/96** DECEMBER 31, 7/2/96**
1997 12/31/96 1997 TO 12/31/96 1997 TO 12/31/96
------------- ---------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 898 $ 468 $ 118 $ -- $ 112 $ 56
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 560 352 251 2 23 2
------ ---------- ----- ----- ------ -----
Net investment income
(loss).................. 338 116 (133) (2) 89 54
------ ---------- ----- ----- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,272 281 -- -- 398 154
Net realized gain (loss)
from sales of
investments............. 183 921 164 18 25 25
------ ---------- ----- ----- ------ -----
Net realized gain
(loss)................ 1,455 1,202 164 18 423 179
Net unrealized gain
(loss).................. (326) 3,447 (695) 68 752 (141)
------ ---------- ----- ----- ------ -----
Net realized and
unrealized gain
(loss)................ 1,129 4,649 (531) 86 1,175 38
------ ---------- ----- ----- ------ -----
Net increase (decrease)
in net assets from
operations............ $1,467 $4,765 $(664) $ 84 $1,264 $ 92
------ ---------- ----- ----- ------ -----
------ ---------- ----- ----- ------ -----
<CAPTION>
INVESCO TOTAL RETURN
FOR THE FOR THE
YEAR ENDED PERIOD
DECEMBER 31, 7/2/96**
1997 TO 12/31/96
------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................. $1,045 $458
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 137 22
------ -----
Net investment income
(loss).................. 908 436
------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 245 1
Net realized gain (loss)
from sales of
investments............. 31 247
------ -----
Net realized gain
(loss)................ 276 248
Net unrealized gain
(loss).................. 5,287 (38)
------ -----
Net realized and
unrealized gain
(loss)................ 5,563 210
------ -----
Net increase (decrease)
in net assets from
operations............ $6,471 $646
------ -----
------ -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH
PERIOD INVESTMENT GRADE INCOME
YEAR ENDED FROM YEAR ENDED
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
---------------------- TO ------------------ FROM 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----------- --------- ---------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 13,225 $ 969 $ 4 $ 550,127 $ 14 $ 11
Net realized gain
(loss)................ 304,724 51,631 18 7,069 -- --
Net unrealized gain
(loss)................ (57,127) (33,389) 17 282,868 (6) 11
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
operations............ 260,822 19,211 39 840,064 8 22
----------- --------- ----- ----------- ----- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 793,195 638,444 -- 9,313,499 -- --
Terminations............ (2,053) -- -- -- -- --
Insurance and other
charges............... (3,267) (2) -- (447,871) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 68,391 617 -- 138,693 -- --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (283) 200 -- -- 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 856,266 638,776 200 9,004,321 -- 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets......... 1,117,088 657,987 239 9,844,385 8 222
NET ASSETS:
Beginning of period....... 658,226 239 -- 230 222 --
----------- --------- ----- ----------- ----- -----
End of period............. $ 1,775,314 $ 658,226 $239 $ 9,844,615 $ 230 $222
----------- --------- ----- ----------- ----- -----
----------- --------- ----- ----------- ----- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------------ FROM 5/1/95** -------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------------ ---------- --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 144,014 $ 1,345 $ 7 $ 50,699 $ 22 $ 1
Net realized gain
(loss)................ -- -- -- 289,590 222 16
Net unrealized gain
(loss)................ -- -- -- 1,759,333 (123) 25
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
operations............ 144,014 1,345 7 2,099,622 121 42
------------ ---------- ----- ----------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 30,656,799 924,390 -- 6,793,979 6,564 --
Terminations............ (31) (13) -- (198) -- --
Insurance and other
charges............... (704,864) (110,367) -- (364,580) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... (1,673,553) (737,246) -- 8,392 14 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (217) 200 -- (256) 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 28,278,351 76,547 200 6,437,593 6,322 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets......... 28,422,365 77,892 207 8,537,215 6,443 242
NET ASSETS:
Beginning of period....... 78,099 207 -- 6,685 242 --
------------ ---------- ----- ----------- ------- -----
End of period............. $ 28,500,464 $ 78,099 $207 $ 8,543,900 $ 6,685 $242
------------ ---------- ----- ----------- ------- -----
------------ ---------- ----- ----------- ------- -----
</TABLE>
** Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
PERIOD SELECT AGGRESSIVE GROWTH
YEAR ENDED FROM YEAR ENDED
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
---------------------- TO ------------------ FROM 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----------- --------- ---------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 818 $ 49 $ 9 $ (706) $ (10) $ --
Net realized gain
(loss)................ 1 5 -- 18,664 646 --
Net unrealized gain
(loss)................ (88) (2) 7 3,863 (425) 49
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
operations............ 731 52 16 21,821 211 49
----------- --------- ----- ----------- ----- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 5,649 2,984 -- 98,882 8,376 --
Terminations............ (713) -- -- (3,662) -- --
Insurance and other
charges............... (163) (54) -- (3,465) (71) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 31,189 (58) -- 117,027 (17) --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (223) 200 -- (296) 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 35,962 2,649 200 208,782 7,992 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets......... 36,693 2,701 216 230,603 8,203 249
NET ASSETS:
Beginning of period....... 2,917 216 -- 8,452 249 --
----------- --------- ----- ----------- ----- -----
End of period............. $ 39,610 $ 2,917 $216 $ 239,055 $8,452 $249
----------- --------- ----- ----------- ----- -----
----------- --------- ----- ----------- ----- -----
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
------------------------ FROM 5/1/95** -------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------------ ---------- --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (19,580) $ 3 $ -- $ 769 $ 8 $ 2
Net realized gain
(loss)................ 415,003 325 -- 14,232 206 9
Net unrealized gain
(loss)................ 1,431,596 (229) 37 (5,403) (126) 30
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
operations............ 1,827,019 99 37 9,598 88 41
------------ ---------- ----- ----------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 5,368,817 1,756 -- 65,720 2,353 --
Terminations............ (18) -- -- (4,379) -- --
Insurance and other
charges............... (292,989) (4) -- (3,633) (4) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 77,472 4 (1) 102,491 (27) --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (285) 200 -- (286) 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 5,153,282 1,471 199 160,199 2,036 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets......... 6,980,301 1,570 236 169,797 2,124 241
NET ASSETS:
Beginning of period....... 1,806 236 -- 2,365 241 --
------------ ---------- ----- ----------- ------- -----
End of period............. $ 6,982,107 $ 1,806 $236 $ 172,162 $ 2,365 $241
------------ ---------- ----- ----------- ------- -----
------------ ---------- ----- ----------- ------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
---------------- FROM 5/1/95** ------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
-------- ------ --------------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 656 $ 21 $ 1 $ 95,806 $ 1,005 $ 2
Net realized gain
(loss)................ 31,600 394 6 193,412 206 1
Net unrealized gain
(loss)................ (5,610) 195 14 (15,069) 3,759 23
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets from
operations............ 26,646 610 21 274,149 4,970 26
-------- ------ ----- ---------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 151,059 5,481 -- 5,449,561 57,697 --
Terminations............ (3,904) -- -- (8) -- --
Insurance and other
charges............... (4,266) -- -- (259,243) (59) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 59,502 (40) -- 109,691 108 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (275) 200 -- (266) 200
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 202,391 5,166 200 5,300,001 57,480 200
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets......... 229,037 5,776 221 5,574,150 62,450 226
NET ASSETS:
Beginning of period....... 5,997 221 -- 62,676 226 --
-------- ------ ----- ---------- ------- -----
End of period............. $235,034 $5,997 $221 $5,636,826 $62,676 $226
-------- ------ ----- ---------- ------- -----
-------- ------ ----- ---------- ------- -----
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
---------------- FROM 5/1/95** --------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- --------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (204) $ (58) $ 5 $ 232 $ 14 $ --
Net realized gain
(loss)................ 544 81 -- 137 46 --
Net unrealized gain
(loss)................ 6,529 (147) 74 2,892 66 21
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets from
operations............ 6,869 (124) 79 3,261 126 21
------- ------- ----- ------- ------ -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 53,911 15,400 -- 37,542 3,933 --
Terminations............ (3,829) -- -- (1,972) -- --
Insurance and other
charges............... (1,570) (214) -- (1,317) (16) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... (4,994) (44) -- 1,864 37 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (299) 200 -- (250) 200
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets from
capital
transactions.......... 43,518 14,843 200 36,117 3,704 200
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets......... 50,387 14,719 279 39,378 3,830 221
NET ASSETS:
Beginning of period....... 14,998 279 -- 4,051 221 --
------- ------- ----- ------- ------ -----
End of period............. $65,385 $14,998 $279 $43,429 $4,051 $221
------- ------- ----- ------- ------ -----
------- ------- ----- ------- ------ -----
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
--------------- FROM 5/1/95** ------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------ --------------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (86) $ (6) $ 4 $ 913 $ (831) $ --
Net realized gain
(loss)................ 699 84 -- 26,454 172 --
Net unrealized gain
(loss)................ 5,483 87 36 43,944 2,233 48
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets from
operations............ 6,096 165 40 71,311 1,574 48
------- ------ ----- --------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 49,237 4,266 -- 137,061 326,955 --
Terminations............ (817) -- -- (17,376) (2) --
Insurance and other
charges............... (1,985) -- -- (4,065) (261) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 2,004 46 -- (169,701) 99 1
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (271) 200 -- (285) 200
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 48,439 4,041 200 (54,081) 326,506 201
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets......... 54,535 4,206 240 17,230 328,080 249
NET ASSETS:
Beginning of period....... 4,446 240 -- 328,329 249 --
------- ------ ----- --------- -------- -----
End of period............. $58,981 $4,446 $240 $ 345,559 $328,329 $249
------- ------ ----- --------- -------- -----
------- ------ ----- --------- -------- -----
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
---------------- FROM 5/1/95** ------------------ FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- --------------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 139 $ (73) $ -- $ 5,745 $ (491) $ --
Net realized gain
(loss)................ 1,566 141 -- 17,404 138 --
Net unrealized gain
(loss)................ 285 1,222 15 28,899 7,451 25
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets from
operations............ 1,990 1,290 15 52,048 7,098 25
------- ------- ----- -------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 31,760 17,543 -- 142,926 184,389 --
Terminations............ (184) (1) -- (172) (1) --
Insurance and other
charges............... (1,796) (460) -- (455) (13) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 687 (36) -- (14,595) 246 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (237) 200 -- (257) 200
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 30,467 16,809 200 127,704 184,364 200
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets......... 32,457 18,099 215 179,752 191,462 225
NET ASSETS:
Beginning of period....... 18,314 215 -- 191,687 225 --
------- ------- ----- -------- -------- -----
End of period............. $50,771 $18,314 $215 $371,439 $191,687 $225
------- ------- ----- -------- -------- -----
------- ------- ----- -------- -------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE INTERNATIONAL INVESCO
STOCK DGPF INTERNATIONAL EQUITY INVESCO INDUSTRIAL INCOME TOTAL RETURN
YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED
DECEMBER 31, FROM 2/9/96** DECEMBER 31, FROM 7/2/96** DECEMBER 31, FROM 7/2/96** DECEMBER 31,
1997 TO 12/31/96 1997 TO 12/31/96 1997 TO 12/31/96 1997
------------ ------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 338 $ 116 $ (133) $ (2) $ 89 $ 54 $ 908
Net realized gain
(loss)................ 1,455 1,202 164 18 423 179 276
Net unrealized gain
(loss)................ (326) 3,447 (695) 68 752 (141) 5,287
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets from
operations............ 1,467 4,765 (664) 84 1,264 92 6,471
------------ ------------- ------------- ------ ------ ------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 36,785 55,319 82,362 2,639 2,869 3,228 26,884
Terminations............ -- -- (1,381) -- -- -- --
Insurance and other
charges............... (1,021) -- (1,510) -- (242) (9) (764)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 532 (18) 1,096 7 3 6 32
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- -- -- -- -- -- --
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... 36,296 55,301 80,567 2,646 2,630 3,225 26,152
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets......... 37,763 60,066 79,903 2,730 3,894 3,317 32,623
NET ASSETS:
Beginning of period....... 60,066 -- 2,730 -- 3,317 -- 17,602
------------ ------------- ------------- ------ ------ ------ ------------
End of period............. $97,829 $60,066 $82,633 $2,730 $7,211 $3,317 $50,225
------------ ------------- ------------- ------ ------ ------ ------------
------------ ------------- ------------- ------ ------ ------ ------------
<CAPTION>
PERIOD
FROM 7/2/96**
TO 12/31/96
-------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 436
Net realized gain
(loss)................ 248
Net unrealized gain
(loss)................ (38)
-------------
Net increase (decrease)
in net assets from
operations............ 646
-------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 17,025
Terminations............ --
Insurance and other
charges............... (117)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 48
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... --
-------------
Net increase (decrease)
in net assets from
capital
transactions.......... 16,956
-------------
Net increase (decrease)
in net assets......... 17,602
NET ASSETS:
Beginning of period....... --
-------------
End of period............. $17,602
-------------
-------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company) established on May 1,
1995 for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Group VEL are
clearly identified and distinguished from the other assets and liabilities of
the Company. Group VEL cannot be charged with liabilities arising out of any
other business of the Company.
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty-one
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc., or of The Morgan Stanley
Universal Funds, Inc. (Morgan Stanley) managed by Miller Anderson & Sherrerd,
LLP. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO and
Morgan Stanley (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act. INVESCO is available only to employees
of INVESCO and its affiliates. Morgan Stanley is available only to employees of
Duke Energy Corporation and its affiliates.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, the portfolio changed its name to Select Value Opportunity
Fund.
Certain prior year balances have been reclassified to conform with current year
presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the
Sub-Accounts are stated at the net asset value per share of the respective
investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price,
DGPF, INVESCO, or Morgan Stanley. 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, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, or Morgan Stanley at net
asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return with First Allmerica. The
SA-14
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company anticipates no tax liability resulting from the operations of Group VEL.
Therefore, no provision for income taxes has been charged against Group VEL.
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, Fidelity VIP II, T.
Rowe Price, DGPF, INVESCO and Morgan Stanley 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>
ALLMERICA INVESTMENT TRUST:
Growth............................................... 734,812 $ 1,865,806 $ 2.416
Investment Grade Income.............................. 8,853,022 9,561,687 1.112
Money Market......................................... 28,500,493 28,500,493 1.000
Equity Index......................................... 3,103,505 6,784,715 2.753
Government Bond...................................... 37,832 39,693 1.047
Select Aggressive Growth............................. 107,441 235,568 2.225
Select Growth........................................ 3,855,415 5,550,754 1.811
Select Growth and Income............................. 110,929 177,661 1.552
Select Value Opportunity*............................ 144,547 240,435 1.626
Select International Equity.......................... 4,203,450 5,648,114 1.341
Select Capital Appreciation.......................... 38,530 58,929 1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income.......................................... 3,198 40,450 13.580
Equity-Income........................................ 2,429 53,374 24.280
Growth............................................... 9,314 299,332 37.100
Overseas............................................. 2,644 49,249 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager........................................ 20,624 335,065 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.................................. 7,679 94,707 12.740
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity................................. 5,324 83,261 15.520
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
Industrial Income.................................... 423 6,601 17.040
Total Return......................................... 3,177 44,975 15.810
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Fixed Income......................................... -- -- --
</TABLE>
* Name changed. See Note 1.
SA-15
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of up to $10. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1997 and 1996, these monthly deductions from sub-account
policy values amounted to $2,099,066 and $335,040, respectively. For the period
ended December 31, 1995, there were no monthly deductions from sub-account
policy values. These amounts are included on the statements of changes in net
assets in Insurance and other charges.
The Company makes a charge of up to .90% per annum based on the average daily
net assets of each
Sub-Account at each valuation date for mortality and expense risks. This charge
may be increased or decreased by the Board of Directors of the Company once each
year, subject to compliance with applicable state and federal requirements, but
the total charge may not exceed .90% per annum. During the first 10 policy
years, the Company also charges each Sub-Account up to .25% per annum based on
the average daily net assets of each Sub-Account for administrative expenses.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of First Allmerica, is principal underwriter and general distributor of Group
VEL, and does not receive any compensation for sales of Group VEL policies.
Commissions are paid to registered representatives of Allmerica Investments or
of independent broker-dealers by the Company. As the current series of policies
have a surrender charge, no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1997, 1996 and 1995, there were no
surrender charges applicable to Group VEL.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
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 Group VEL satisfies the current requirements of
the regulations, and it intends that Group VEL will continue to meet such
requirements.
SA-16
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF, INVESCO and Morgan Stanley shares by Group VEL
during the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth.......................................................... $ 1,457,017 $ 304,906
Investment Grade Income......................................... 10,029,950 475,557
Money Market.................................................... 30,454,456 2,032,062
Equity Index.................................................... 7,084,692 364,366
Government Bond................................................. 37,760 980
Select Aggressive............................................... 234,349 8,357
Select Growth................................................... 5,809,325 311,671
Select Growth and Income........................................ 184,500 9,596
Select Value Opportunity*....................................... 244,287 10,342
Select International Equity..................................... 5,839,070 261,107
Select Capital Appreciation..................................... 56,171 12,857
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income..................................................... 40,488 4,096
Equity-Income................................................... 53,137 4,327
Growth.......................................................... 162,155 205,367
Overseas........................................................ 34,993 3,022
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager................................................... 167,958 17,604
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock............................................. 39,576 1,670
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity............................................ 84,554 4,120
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
Industrial Income............................................... 3,949 832
Total Return.................................................... 32,380 5,075
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Fixed Income.................................................... -- --
------------ ------------
$ 62,050,767 $ 4,037,914
------------ ------------
------------ ------------
</TABLE>
* Name changed. See Note 1.
SA-17
<PAGE>
PROSPECTUS B
GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
This Prospectus describes certificates ("Certificate" or "Certificates") issued
under group flexible premium variable life insurance policies ("Policy" or
"Policies") offered by Allmerica Financial Life Insurance and Annuity Company
("Company") to eligible applicants ("Certificate Owners") who are members of a
non-qualified benefit plan having a minimum of five or more members, depending
on the group, and are Age 80 years old and under.
The certificates permit you to allocate Net Premiums among up to 20 sub-accounts
("Sub-Accounts") of the Group VEL Account ("Separate Account"), a separate
account of the Company, and a fixed interest account ("General Account") of the
Company (together "Accounts"). Each Sub-Account invests its assets in a
corresponding investment portfolio of Allmerica Investment Trust ("Trust"),
Mutual Fund Variable Annuity Trust ("MFVAT"), Delaware Group Premium Fund, Inc.
("DGPF") and T. Rowe Price International Series, Inc. ("T. Rowe Price"). The
following underlying funds are available under the Certificates:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST MFVAT
Select Aggressive Growth Fund International Equity Portfolio
Select Capital Appreciation Fund Capital Growth Portfolio
Select Value Opportunity Fund Growth and Income Portfolio
Select Growth Fund Asset Allocation Portfolio
Equity Index Fund U.S. Government Income Portfolio
Investment Grade Income Fund
Money Market Fund
DGPF T. ROWE PRICE
International Equity Series T. Rowe Price International Stock
Portfolio
</TABLE>
(Certain Funds may not be available in all states)
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF
ALLMERICA INVESTMENT TRUST, MUTUAL FUND VARIABLE ANNUITY TRUST, DELAWARE GROUP
PREMIUM FUND, INC. AND T. ROWE PRICE INTERNATIONAL SERIES, INC. INVESTORS SHOULD
RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CERTIFICATES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE
CERTIFICATES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK OR CREDIT UNION. THE CERTIFICATES ARE NOT INSURED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER
FEDERAL AGENCY. INVESTMENTS IN THE CERTIFICATES ARE SUBJECT TO VARIOUS RISKS,
INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED DECEMBER 15, 1998
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
<PAGE>
(Continued from cover page)
Within limits, you may choose the amount of initial premium desired and the
initial Death Benefit. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Certificate's Surrender Value, or the Certificate may
be fully surrendered at any time, subject to certain limitations.
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (See "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY OR CERTIFICATE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................ 5
SUMMARY.............................................................................. 8
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS........... 16
INVESTMENT OBJECTIVES AND POLICIES................................................... 18
INVESTMENT ADVISORY SERVICES......................................................... 20
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................................... 22
VOTING RIGHTS........................................................................ 23
THE CERTIFICATE...................................................................... 23
Enrollment Form for a Certificate.................................................. 23
Free-Look Period................................................................... 24
Conversion Privileges.............................................................. 25
Premium Payments................................................................... 25
Allocation of Net Premiums......................................................... 26
Transfer Privilege................................................................. 26
Election of Death Benefit Options.................................................. 27
Guideline Premium Test and Cash Value Accumulation Test............................ 27
Death Proceeds..................................................................... 28
Change in Death Benefit Option..................................................... 30
Change in Face Amount.............................................................. 31
Certificate Value and Surrender Value.............................................. 32
Payment Options.................................................................... 33
Optional Insurance Benefits........................................................ 33
Surrender.......................................................................... 34
Paid-Up Insurance Option........................................................... 34
Partial Withdrawal................................................................. 35
CHARGES AND DEDUCTIONS............................................................... 35
Premium Expense Charge............................................................. 35
Monthly Deduction from Certificate Value........................................... 36
Charges Reflected in the Assets of the Separate Account............................ 39
Surrender Charge................................................................... 39
Charges on Partial Withdrawal...................................................... 40
Transfer Charges................................................................... 41
Charge for Change in Face Amount................................................... 41
Other Administrative Charges....................................................... 41
CERTIFICATE LOANS.................................................................... 42
CERTIFICATE TERMINATION AND REINSTATEMENT............................................ 43
OTHER CERTIFICATE PROVISIONS......................................................... 44
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY...................................... 47
DISTRIBUTION......................................................................... 48
SERVICES............................................................................. 48
REPORTS.............................................................................. 49
LEGAL PROCEEDINGS.................................................................... 49
FURTHER INFORMATION.................................................................. 49
INDEPENDENT ACCOUNTANTS.............................................................. 49
FEDERAL TAX CONSIDERATIONS........................................................... 49
The Company and the Separate Account............................................... 50
Taxation of the Certificates....................................................... 50
Certificate Loans.................................................................. 51
Modified Endowment Contracts....................................................... 51
MORE INFORMATION ABOUT THE GENERAL ACCOUNT........................................... 51
YEAR 2000 DISCLOSURE................................................................. 53
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS................................................................. 54
APPENDIX A -- OPTIONAL BENEFITS...................................................... A-1
APPENDIX B -- PAYMENT OPTIONS........................................................ B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES AND ACCUMULATED
PREMIUMS............................................................................ C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES............................... D-1
UNAUDITED FINANCIAL STATEMENTS....................................................... UF-1
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
COMPANY: Allmerica Financial Life Insurance and Annuity Company.
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard Ordinary
Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex
Certificates), net investment earnings at an annual effective rate of 5%, and
fees and charges as set forth in the Certificate and any
5
<PAGE>
Certificate riders. The Death Benefit Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
MINIMUM DEATH BENEFIT: The minimum Death Benefit required to qualify the
Certificate as "life insurance" under federal tax laws. The Minimum Death
Benefit varies by Age. It is calculated by multiplying the Certificate Value by
a percentage determined by the Insured's Age.
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
NET PREMIUM: An amount equal to the premium less any premium expense charge.
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Mutual Fund Variable Annuity Trust, the
International Equity Series of the Delaware Group Premium Fund, Inc. or the T.
Rowe Price International Stock Portfolio of T. Rowe Price International Series,
Inc.
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
6
<PAGE>
UNDERLYING FUNDS ("FUNDS"): The Funds of Allmerica Investment Trust, the
Portfolios of Mutual Fund Variable Annuity Trust, the Series of Delaware Group
Premium Fund, Inc. and the Portfolio of T. Rowe Price International Series,
Inc., which are available under the Certificates.
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
UNIT: A measure of your interest in a Sub-Account.
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, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
WRITTEN REQUEST: A request by the Certificate Owner in writing, satisfactory to
the Company.
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
7
<PAGE>
SUMMARY
THE CERTIFICATE
The Certificate issued under a group flexible premium variable life policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
- life insurance coverage on the named Insured;
- Certificate Value;
- surrender rights and partial withdrawal rights;
- loan privileges; and
- in some cases, additional insurance benefits available by rider for an
additional charge.
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. Although you may establish a schedule of premium payments
("planned premium payments"), failure to make the planned premium payments will
not necessarily cause a Certificate to lapse, nor will making the planned
premium payments guarantee that a Certificate will remain in force. Thus, you
may, but are not required to, pay additional premiums.
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
SURRENDER CHARGES
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the
8
<PAGE>
maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
A separate surrender charge may apply to and be calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge of up to $8.50
per thousand dollars of increase, and (b) is a deferred sales charge of up to
50% (less any premium expense charge not associated with state and local premium
taxes) of premiums associated with the increase, up to the Guideline Annual
Premium for the increase. In accordance with limitations under state insurance
regulations, the amount of the surrender charge will not exceed a specified
amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge."
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from zero to 1% of premiums, depending on the group to which
the Policy is issued. The charge for distribution expenses may range from zero
to 10%. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-
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<PAGE>
Account to which it relates on a Monthly Processing Date, the unpaid balance
will be totaled and the Company will make a Pro-Rata Allocation.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value."
TRANSACTION CHARGES
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
TRANSFER CHARGE
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
CHARGES OF THE UNDERLYING INVESTMENT FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. See CHARGES AND
DEDUCTIONS -- "Charges Reflected in the Assets of the Separate Account." The
levels of fees and expenses vary among the Underlying Investment Funds.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has
10
<PAGE>
been allocated, and partial withdrawals. The Certificate Value may be relevant
to the computation of the Death Proceeds. You bear the entire investment risk
for amounts allocated to the Separate Account. The Company does not guarantee a
minimum Certificate Value.
The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
DEATH PROCEEDS
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the Face Amount plus the Certificate Value or the Minimum Death
Benefit. The Minimum Death Benefit is equivalent to a percentage (determined
each month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE CERTIFICATE -- "Death Proceeds."
The Death Proceeds under the Certificate may be received in a lump sum or under
one of the Payment Options the Company offers. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST DEATH BENEFIT
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Change in Face Amount."
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider and Exchange
Option Rider. See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
CERTIFICATE ISSUANCE
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the
11
<PAGE>
enrollment form and medical examination, if any, are completed. If the proposed
Insured cannot answer the eligibility questions "No," and if the proposed
Insured is not a standard risk, insurance coverage will begin only after the
Company (1) approves the enrollment form, (2) the Certificate is delivered and
accepted, and (3) the first premium is paid.
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
If your Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be allocated to the Money Market Fund of the Trust upon
Issuance and Acceptance of the Certificate. All Certificate Value will be
allocated as you have chosen no later than the expiration of the period during
which you may exercise the "Right-to-Examine Certificate" provision.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
INVESTMENT OPTIONS
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account is currently comprised
of 41 Sub-Accounts, of which 14 are currently available under the Certificates.
Each Sub-Account invests exclusively in a corresponding Underlying Fund of the
Allmerica Investment Trust ("Trust"), managed by Allmerica Financial Investment
Management Services, Inc. ("AFIMS"), of the Mutual Fund Variable Annuity Trust
("MFVAT"), managed by The Chase Manhattan Bank, N.A. ("Chase"), of the Delaware
Group Premium Fund, Inc. ("DGPF"), managed by Delaware International Advisers
Ltd. ("Delaware International"), or the T. Rowe Price International Series, Inc.
("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc
("Price-Fleming"). In some states, insurance regulations may restrict the
availability of particular Underlying Funds. The Certificates permit you to
transfer Certificate Value among the available Sub-Accounts and between the Sub-
Accounts and the General Account, subject to certain limitations described under
THE CERTIFICATE -- "Transfer Privilege."
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
12
<PAGE>
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AFTER ANY TOTAL EXPENSES
VOLUNTARY OTHER FUND (AFTER ANY
UNDERLYING FUND WAIVER) EXPENSES APPLICABLE LIMITATIONS)
- ------------------------------------------------------------- ------------------ ------------- -----------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund................................ 0.89%* 0.09% 0.98%(2)(3)
Select Capital Appreciation Fund............................. 0.95%* 0.15% 1.10%(2)
Select Value Opportunity Fund................................ 0.90%** 0.14% 1.04%(2)(3)
DGPF International Equity Series............................. 0.75%(1) 0.15% 0.90%(1)
MFVAT International Equity Portfolio......................... 0.00%(#) 1.11% 1.11%(#)
T. Rowe Price International Stock Portfolio.................. 1.05% 0.00% 1.05%
Select Growth Fund........................................... 0.85%* 0.08% 0.93%(2)(3)
MFVAT Capital Growth Portfolio............................... 0.00%(#) 0.90% 0.90%(#)
Equity Index Fund............................................ 0.31% 0.13% 0.44%(2)
MFVAT Growth and Income Portfolio............................ 0.00%(#) 0.90% 0.90%(#)
MFVAT Asset Allocation Portfolio............................. 0.00%(#) 0.85% 0.85%(#)
Investment Grade Income Fund................................. 0.44%* 0.10% 0.54%(2)
MFVAT U.S. Government Income Portfolio....................... 0.00%(#) 0.80% 0.80%(#)
Money Market Fund............................................ 0.27% 0.08% 0.35%(2)
</TABLE>
* Effective September 1, 1997, the management fee rates for the Select
Aggressive Growth Fund, Select Capital Appreciation Fund and Investment Grade
Income Fund were revised. The management fee ratios shown in the table above
have been adjusted to assume that the revised rates took effect on January 1,
1997. Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The new management fee rate has no effect on the management fee
rate for 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 rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% 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 limitations took effect on January 1, 1997. Without these
adjustments, the management fee ratio and the total fund expense ratio would
have been 0.95% and 1.09%, respectively. The management fee limitation may be
terminated at any time.
(#) Reflects current waiver arrangements as of fiscal year ended August 31, 1997
to maintain Total Fund Expenses at the levels indicated above. Absent such
waivers, the Advisory Fees for the MFVAT International Equity, MFVAT Capital
Growth, MFVAT Growth and Income, MFVAT Asset Allocation and MFVAT U.S.
Government Income Portfolios would be 0.80%, 0.60%, 0.60%, 0.55% and 0.50%,
respectively, and Total Fund Expenses for the MFVAT International Equity, MFVAT
Capital Growth, MFVAT Growth and Income, MFVAT Asset Allocation and MFVAT U.S.
Government Income Portfolios would be 2.99%, 1.70%, 1.70%, 2.03% and 1.50%.
(1) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through April 30, 1999. The fee ratios shown above have been adjusted to assume
that the new voluntary limitation took effect on January 1, 1997. In 1997, the
actual ratio of total annual expenses of the International Equity Series was
0.85%, and the actual management fee ratio was 0.70%.
(2) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.25% for the Select Value
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<PAGE>
Opportunity Fund, 1.20% for the Select Growth Fund, 1.00% for the Investment
Grade Income Fund and 0.60% for the Money Market Fund and Equity Index Fund. The
total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1997.
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these Funds. These
limitations may be terminated at any time.
(3) These Funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expense ratios would have been 0.93% for the
Select Aggressive Growth Fund, 0.91% for the Select Growth Fund and 0.98% for
the Select Value Opportunity Fund.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
If your Certificate provides for a full refund of the initial premium under its
"Right-to-Examine Certificate" provision as required in your state, your refund
will be the greater of (a) your entire premium, or (b) the Certificate Value
plus deductions under the Certificate, or by the Underlying Funds for taxes,
charges or fees. If your Certificate does not provide for a full refund of the
initial premium, you will receive the Certificate Value in the Separate Account,
plus premiums paid, including fees and charges, minus the amounts allocated to
the Separate Account, plus the fees and charges imposed on amounts in the
Separate Account. After an increase in The Face Amount, a right to cancel the
increase also applies. See THE CERTIFICATE -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24 Certificate months after the date of an
increase in the Face Amount. Where required by state law, and at your request,
the Company will issue a flexible premium adjustable life insurance Certificate
to you. The new Certificate will have the same face amount, issue Age, Date of
Issue, and risk classifications as the original Certificate. See THE CERTIFICATE
- -- "Conversion Privileges."
PARTIAL WITHDRAWAL
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by
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<PAGE>
the amount of the partial withdrawal charge deducted. See THE CERTIFICATE --
"Partial Withdrawal" and CHARGES AND DEDUCTIONS -- "Charges on Partial
Withdrawal."
LOAN PRIVILEGE
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge, Monthly Deductions, and
interest on the Certificate loan to the end of the Certificate year. Thereafter,
Loan Value is 90% of an amount equal to Certificate Value less the surrender
charge.
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the Accounts. In either
case, Certificate Value equal to the Certificate loan will be transferred from
the appropriate Sub-Accounts to the General Account, and will earn monthly
interest at an effective annual rate of at least 6%. Therefore, a Certificate
loan may have a permanent impact on the Certificate Value even though it is
eventually repaid. Although the loan amount is a part of the Certificate Value,
the Death Proceeds will be reduced by the amount of outstanding Debt at the time
of death.
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
CERTIFICATE LAPSE AND REINSTATEMENT
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
TAX TREATMENT
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required
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<PAGE>
under Section 7702 of the Code because of a reduction in benefits under the
Certificate. Death Proceeds under the Certificate are excludable from the gross
income of the Beneficiary, but in some circumstances the Death Proceeds or the
Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
The Certificate summarizes the provisions of the group Policy under which it is
issued, which has the purpose of providing insurance protection for the
Beneficiary named therein. References to Certificate rights and features are
intended to represent a Certificate Owner's rights and benefits under the group
Policy. This Summary is intended to provide only a very brief overview of the
more significant aspects of the Certificate. Further detail is provided in this
Prospectus, the Certificate and the group Policy. No claim is made that the
Certificate is in any way similar or comparable to a systematic investment plan
of a mutual fund.
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000 ("Principal Office"). Prior to
October 1, 1995, the Company was known as SMA Life Assurance Company. As of
December 31, 1997, the Company had over $9.4 billion in assets. The Company 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, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. The Company is an indirectly
wholly owned subsidiary of First Allmerica Financial Life Insurance Company
("First Allmerica"), formerly State Mutual Life Assurance Company of America,
440 Lincoln Street, Worcester, Massachusetts. First Allmerica, organized under
the laws of Massachusetts in 1844, is the fifth oldest life insurance company in
America.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 22, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
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<PAGE>
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account and are kept separate and apart from the general assets
of the Company. Under Delaware law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 41 Sub-Accounts. Each Sub-Account is administered and accounted for as part
of the general business of the Company, but the income, capital gains, or
capital losses of each Sub-Account are allocated to such Sub-Account, without
regard to other income, capital gains, or capital losses of the Company or the
other Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of the Allmerica Investment Trust, the Mutual Fund Variable
Annuity Trust, the Delaware Group Premium Fund, Inc., or the T. Rowe Price
International Series, Inc.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds. 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
First Allmerica, the Company, or other affiliated insurance companies. Seven
investment portfolios of the Trust ("Funds") are available under the
Certificates, each issuing a series of shares: Select Aggressive Growth Fund,
Select Capital Appreciation Fund, Select Value Opportunity Fund, Select Growth
Fund, Equity Index Fund, Investment Grade Income Fund and 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 generally 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
separate accounts.
AFIMS serves as 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.
MUTUAL FUND VARIABLE ANNUITY TRUST
Mutual Fund Variable Annuity Trust ("MFVAT") is an open-end, management
investment company organized as a Massachusetts business trust in 1994. MFVAT
was established to provide a funding medium for certain variable annuity
contracts. Five investment portfolios are available under the Certificates: the
International Equity Portfolio, Capital Growth Portfolio, Growth and Income
Portfolio, Asset Allocation Portfolio and U.S. Government Income Portfolio.
The Chase Manhattan Bank, N.A. ("Chase") is the investment adviser,
administrator and custodian for the funds of MFVAT. Chase is located at 270 Park
Avenue, New York, New York 10017. As investment adviser to the funds of MFVAT,
Chase makes investment decisions subject to such policies as the Board of
Trustees of MFVAT may determine. As administrator of the funds, Chase provides
certain services including coordinating relations with independent contractors
and agents, preparing for signature by officers and filing of certain documents,
preparing financial statements, arranging for the maintenance of books and
records, and providing office facilities. Certain of these services have been
delegated to Vista Fund Distributors, Inc. ("VFD"), 101 Park Avenue, New York,
New York 10178, which serves as sub-administrator to the funds of MFVAT. As
custodian, Chase's responsibilities include safeguarding and controlling the
funds' cash and securities, handling the receipt and delivery of securities,
determining income and collecting interest on investments, maintaining books of
original entry and other required books and accounts, and calculating daily net
asset values. See "Investment Advisory Services to MFVAT."
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<PAGE>
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. DGPF
was established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio is available under the Certificates: the International Equity Series
("Series"). The investment adviser for the International Equity Series is
Delaware International Advisers Ltd. ("Delaware International"). See "Investment
Advisory Services to DGPF.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (see "Investment Advisory
Services to T. Rowe Price"), is an open-end, diversified, management investment
company organized as a Maryland corporation in 1994 and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Certificates: the T. Rowe Price International Stock Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund seeks above-
average capital appreciation by investing primarily in common stocks of
companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund seeks
long-term growth of capital in a manner consistent with the preservation of
capital. Realization of income is not a significant investment consideration any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund invests primarily in common stock of industries and
companies which are believed to be experiencing favorable demand for their
products and services, and which operate in a favorable competitive environment
and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund seeks long-
term growth of capital by investing principally in a 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.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
MFVAT INTERNATIONAL EQUITY PORTFOLIO -- The International Equity Portfolio of
MFVAT seeks to provide a total return on assets from long-term growth of capital
and from income principally through a broad portfolio of marketable equity
securities of established foreign companies organized in countries other than
the United States and foreign subsidiaries of U.S. companies participating in
foreign economies.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
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<PAGE>
SELECT GROWTH FUND -- The Select Growth Fund seeks to achieve long-term growth
of capital by investing in a diversified portfolio consisting primarily of
common stocks selected on the basis of their long-term growth potential.
MFVAT CAPITAL GROWTH PORTFOLIO -- The MFVAT Capital Growth Portfolio seeks to
provide long-term capital growth primarily through diversified holdings (i.e.,
at least 80% of its assets under normal circumstances) in common stocks. The
Portfolio will seek to invest its assets in stocks of issuers (including foreign
issuers) with small to medium capitalizations. Divided income, if any, is a
consideration incidental to the Portfolio's investment objective of growth of
capital.
EQUITY INDEX FUND -- The Equity Index Fund seeks to provide investment results
that correspond to the aggregate price and yield performance of a representative
selection of United States publicly traded common stocks. The Equity Index Fund
seeks to achieve its objective by attempting to replicate the aggregate price
and yield performance of the Standard & Poor's Composite Index of 500 Stocks.
MFVAT GROWTH AND INCOME PORTFOLIO -- The Growth and Income Portfolio of MFVAT
seeks to provide long-term capital appreciation and to provide dividend income
primarily through a broad portfolio (i.e., at least 80% of its assets under
normal circumstances) of common stocks. In addition, the Portfolio may invest up
to 20% of its total assets in convertible securities.
MFVAT ASSET ALLOCATION PORTFOLIO -- The Asset Allocation Portfolio of MFVAT
seeks to provide maximum total return through a combination of long-term growth
of capital and current income by investing in a diversified portfolio of equity
and debt securities, including common stocks, convertible securities and
government and corporate fixed-income obligations. Under normal market
conditions, between 35%-70% of the Portfolio's total assets will be invested in
common stocks and other equity investments and at least 25% of the Portfolio's
assets will be invested in fixed-income senior securities, defined for this
purpose to include non-convertible corporate debt securities and government
obligations.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund is invested in
a diversified portfolio of fixed income securities with the objective of seeking
as high a level of total return (including both income and capital appreciation)
as is consistent with prudent investment management.
MFVAT U.S. GOVERNMENT INCOME PORTFOLIO -- The MFVAT U.S. Government Income
Portfolio seeks to provide monthly dividends as well as to protect the value of
an investor's investment (i.e., to preserve principal) by investing at least 65%
of its assets in U.S. Treasury obligations, obligations issued or guaranteed by
U.S. government agencies or instrumentalities if such are backed by the "full
faith and credit" of the U.S. Treasury and securities issued or guaranteed as to
principal and interest by the U.S. government or by agencies or
instrumentalities thereof. Neither the United States nor any of its agencies
insures or guarantees the market value of shares of the Portfolio.
MONEY MARKET FUND -- The Money Market Fund is invested in a diversified
portfolio of high-quality, short-term money market instruments with the
objective of obtaining maximum current income consistent with the preservation
of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later
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of (1) the effective date of such change in the investment policy, or (2) the
receipt of the notice of your right to transfer. You may then change your
premium and deduction allocation percentages.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trust has entered into a Management Agreement with AFIMS,
an indirect wholly owned subsidiary of First Allmerica, to handle the day-to-day
affairs of the Trust. AFIMS, subject to review by the Trustees, is responsible
for the general management of the Funds. AFIMS also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities, and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with AFIMS.
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, and reports to shareholders, and
other expenses.
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund.
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For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
<TABLE>
<S> <C> <C>
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation First $100 million
Fund 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%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
The Prospectus of the Trust contains additional information concerning the
Funds, including information concerning additional expenses paid by the Funds,
and should be read in conjunction with this Prospectus.
INVESTMENT ADVISORY SERVICES TO MFVAT
The Chase Manhattan Bank, N.A. ("Chase") acts as investment adviser to the
Portfolios pursuant to an Investment Advisory Agreement and has overall
responsibility for investment decisions of the Portfolios, subject to the
oversight of the Board of Trustees. Chase is a wholly-owned subsidiary of The
Chase Manhattan Corporation, a bank holding company, and is located at 270 Park
Avenue, New York, New York 10017. Chase and its predecessors have over 100 years
of money management experience.
For its investment advisory services to the Portfolios, Chase is entitled to
receive an annual fee computed daily and paid monthly at an annual rate based on
the average daily net assets of each Portfolio as follows:
<TABLE>
<CAPTION>
UNDERLYING FUND RATE
- ------------------------------------------------------------------------------------ ---------
<S> <C>
International Equity Portfolio...................................................... 0.80%
Capital Growth Portfolio............................................................ 0.60%
Growth and Income Portfolio......................................................... 0.60%
Asset Allocation Portfolio.......................................................... 0.55%
U.S. Government Income Portfolio.................................................... 0.50%
</TABLE>
Chase Asset Management, Inc. ("CAM"), a registered investment adviser, is the
sub-investment adviser to each of the Portfolios other than the International
Equity Portfolio pursuant to a Sub-Investment Advisory
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<PAGE>
Agreement between CAM and Chase. CAM is a wholly-owned operating subsidiary of
Chase and makes investment decisions for the Portfolios on a day-to-day basis.
Chase Asset Management (London) Limited ("CAM London"), a registered investment
adviser, is the sub-investment adviser to the International Equity Portfolio
pursuant to a Sub-Investment Advisory Agreement between CAM London and Chase.
CAM London is wholly-owned operating subsidiary of Chase. CAM London make
investment decisions for the Portfolio on a day-to-day basis.
INVESTMENT ADVISORY SERVICES TO DGPF
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers with approximately $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
average daily net assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem 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 Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate 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 Certificate
Owners on a basis to be determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of the Trust, the Portfolios of MFVAT, the
Series of DGPF and the Portfolio of T. Rowe Price are also issued to variable
annuity and variable life separate accounts of other unaffiliated insurance
companies ("mixed and shared funding"). It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
contract owners or variable annuity contract owners. Although the Company and
the Underlying Investment Companies do not currently foresee any such
disadvantages to either variable life insurance contract owners or variable
annuity contract owners, the Company and the respective Trustees intend to
monitor events in order to
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<PAGE>
identify any material conflicts between such contract owners and to determine
what action, if any, should be taken in response thereto. If the Trustees were
to conclude that separate funds should be established for variable life and
variable annuity separate accounts, the Company will bear the attendant
expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement change, the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
reregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. 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 Certificates, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Certificate Owners or the Trustees. The Company's disapproval of
any such change must be reasonable and, in the case of a change in investment
policies or investment adviser, based on a good faith determination that such
change would be contrary to state law or otherwise is inappropriate in light of
the objectives and purposes of the Underlying Funds. In the event the Company
does disregard voting instructions, a summary of and the reasons for that action
will be included in the next periodic report to Certificate Owners.
THE CERTIFICATE
ENROLLMENT FORM FOR A CERTIFICATE
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's
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underwriting guidelines, but in underwriting insurance, the Company shall comply
with all applicable federal and state prohibitions concerning unfair
discrimination.
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company (1) approves
the enrollment form, (2) the Certificate is delivered and accepted, and (3) the
first premium is paid.
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt of the premium at the Principal Office. If the
Certificate is not issued, the premiums will be returned to you without
interest.
If the Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be transferred to the Sub-Account investing in the Money
Market Fund of the Trust upon Issuance and Acceptance of the Certificate. All
Certificate Value will be allocated as you have chosen not later than the
expiration of the period during which you may exercise the "Right-to-Examine
Certificate" provision. If the "Payor Provision" is in effect, (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Payor Provisions"), Payor premiums which are
not "excess premiums" will be transferred to the Monthly Deduction Sub-Account
not later than three days after underwriting approval of the Certificate.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will, within seven days, mail a
refund. (The refund of any premium paid by check may be delayed until the check
has cleared your bank.) If the Certificate provides for a full refund of the
initial premium under its "Right-to-Examine Certificate" provision as required
in your state, your refund will be the greater of (a) your entire premium, or
(b) the Certificate Value plus deductions under the Certificate or by the
Underlying Funds for taxes, charges or fees. If the Certificate does not provide
for a full refund of the initial premium, you will receive the Certificate Value
in the Separate Account, plus premiums paid, including fees and charges, minus
the amounts allocated to the Separate Account, plus the fees and charges imposed
on amounts in the Separate Account.
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but
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for the increase. The amount to be credited will be refunded if you so request.
The Company will also waive any surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $50.
Premiums are not limited as to frequency and number. However, no premium payment
may be less than $100 without the Company's consent. Moreover, premium payments
must be sufficient to cover the next Monthly Deduction plus loan interest
accrued, or the Certificate may lapse. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Certificate, if required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the
Death Benefit Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Certificate during a
Certificate year. See CERTIFICATE TERMINATION AND REINSTATEMENT.
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ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%. You may change the allocation of future Net
Premiums at any time pursuant to written or telephone request. If allocation
changes by telephone are elected by the Certificate Owner, a properly completed
authorization form must be on file before telephone requests will be honored.
The policy of the Company and its agents and affiliates is that they will not be
responsible for losses resulting from acting upon telephone requests reasonably
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a Certificate Owner identify themselves
by name and identify the Certificate Owner by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded. An
allocation change will be effective as of the date of receipt of the notice at
the Principal Office. No charge is currently imposed for changing premium
allocation instructions. The Company reserves the right to impose such a charge
in the future, but guarantees that the charge will not exceed $25.
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Transfers involving the General Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the General Account; and
(b) The amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Certificate.
These rules are subject to change by the Company.
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Account which invests in the Money Market Fund to one or more
of the other Sub-Accounts ("Dollar Cost Averaging Option"), or (b) to
automatically reallocate Certificate Value among the Sub-Accounts ("Automatic
Rebalancing Option"). Automatic transfers may be made on a monthly, bimonthly,
quarterly, semiannual or annual schedule. Generally, all transfers will be
processed on the 15th of each scheduled month. However, if the 15th is not a
business day or is the Monthly Processing Date, the automatic transfer will be
processed on
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the next business day. The Dollar Cost Averaging Option and the Automatic
Rebalancing Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and (4)
the maximum amount that may be transferred each time from the General Account.
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge. Any transfers made with respect to a conversion privilege, Certificate
loan or material change in investment policy will not count towards the twelve
free transfers.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a minimum death benefit in relation to cash value for a
Certificate to qualify as life insurance. Under current federal tax law, either
the Guideline Premium test or the Cash Value Accumulation test can be used to
determine if the Certificate complies with the definition of "life insurance" in
Section 7702 of the Code. At the time of application, the Employer may elect
either of the tests.
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. If the Cash Value Accumulation
test is chosen by the employer, ONLY Death Benefit Option 3 will apply. Death
Benefits Option 1 and Option 2 are NOT available under the Cash Value
Accumulation test.
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the minimum
Death Benefit relative to the Certificate Value are different. Required
increases in the minimum Death Benefit due to growth in Certificate Value will
generally be greater under the Cash Value Accumulation test than under the
Guideline Premium test. APPLICANTS FOR A POLICY SHOULD CONSULT A QUALIFIED TAX
ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
OPTION 1 -- LEVEL DEATH BENEFIT
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Minimum Death Benefit, as set forth in the table below. Under Option 1, the
Death Benefit will remain level unless the Minimum Death Benefit is greater than
the Face Amount, in which case the Death Benefit will vary as the Certificate
Value varies. Option 1 will offer the best opportunity for the Certificate Value
under a Certificate to increase without increasing the Death Benefit as quickly
as it might under the other options. The Death Benefit will never go below the
Face Amount.
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OPTION 2 -- ADJUSTABLE DEATH BENEFIT
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Minimum Death Benefit, as set forth in the
table below. The Death Benefit will, therefore, vary as the Certificate Value
changes, but will never be less than the Face Amount. Option 2 will offer the
best opportunity for the Certificate Owner who would like to have an increasing
Death Benefit as early as possible. The Death Benefit will increase whenever
there is an increase in the Certificate Value, and will decrease whenever there
is a decrease in the Certificate Value, but will never go below the Face Amount.
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the Certificate at the "seven-pay"
limit for the full seven years. When the Certificate Value multiplied by the
applicable Death Benefit Factor exceeds the Face Amount, the Death Benefit will
increase whenever there is an increase in the Certificate Value, and will
decrease whenever there is a decrease in the Certificate Value, but will never
go below the Face Amount. OPTION 3 MAY NOT BE AVAILABLE IN ALL STATES.
DEATH PROCEEDS
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will be determined as of the date of the
Company's receipt of due proof of the Insured's death.
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
The Minimum Death Benefit under Option 1 or Option 2 is equal to a percentage of
the Certificate Value as set forth below. The Minimum Death Benefit is
determined in accordance with the Code regulations to ensure that the
Certificate qualifies as a life insurance contract and that the insurance
proceeds may be excluded from the gross income of the Beneficiary.
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MINIMUM DEATH BENEFIT TABLE
(Option 1 and Option 2)
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Certificate Value
- ---------------------------------------------------------- -------------------
<S> <C>
40 and under.......................................... 250%
45.................................................... 215%
50.................................................... 185%
55.................................................... 150%
60.................................................... 130%
65.................................................... 120%
70.................................................... 115%
75.................................................... 105%
80.................................................... 105%
85.................................................... 105%
90.................................................... 105%
95 and above.......................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
ILLUSTRATION OF OPTION 1
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt.
Under Option 1, a Certificate with a $50,000 Face Amount will generally have a
Death Benefit equal to $50,000. However, because the Death Benefit must be equal
to or greater than 250% of Certificate Value, if at any time the Certificate
Value exceeds $20,000, the Death Benefit will exceed the $50,000 Face Amount. In
this example, each additional dollar of Certificate Value above $20,000 will
increase the Death Benefit by $2.50. For example, a Certificate with a
Certificate Value of $35,000 will have a Minimum Death Benefit of $87,500
($35,000 X 2.50); Certificate Value of $40,000 will produce a Minimum Death
Benefit of $100,000 ($40,000 X 2.50); and Certificate Value of $50,000 will
produce a Minimum Death Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
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(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
ILLUSTRATION OF OPTION 2
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Minimum Death Benefit will be $87,500 ($35,000 X 2.50); Certificate
Value of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X
2.50); and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is less than the Face Amount plus
Certificate Value, then the Death Benefit will be the current Face Amount plus
Certificate Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
CHANGE IN DEATH BENEFIT OPTION
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of the request. No charges will be imposed on changes in Death Benefit Options.
IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Minimum Death Benefit). The
cost of insurance may be higher or lower than it otherwise would have been since
any increases or decreases in Certificate Value will, respectively, reduce or
increase the Insurance Amount at Risk under Option 1. Assuming a positive net
investment return with respect to any amounts in the Separate Account, changing
the Death Benefit Option from Option 2 to Option 1 will
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<PAGE>
reduce the Insurance Amount at Risk and, therefore, the cost of insurance charge
for all subsequent Monthly Deductions, compared to what such charge would have
been if no such change were made. If the Death Benefit Option is changed from
Option 1 to Option 2, the Face Amount will be decreased to equal the Death
Benefit less the Certificate Value on the effective date of the change. This
change may not be made if it would result in a Face Amount less than $40,000. A
change from Option 1 to Option 2 will not alter the amount of the Death Benefit
at the time of the change, but will affect the determination of the Death
Benefit from that point on. Because the Certificate Value will be added to the
new specified Face Amount, the Death Benefit will vary with the Certificate
Value. Thus, under Option 2, the Insurance Amount at Risk will always equal the
Face Amount unless the Minimum Death Benefit is in effect. The cost of insurance
may also be higher or lower than it otherwise would have been without the change
in Death Benefit Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
INCREASES
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than an amount determined by the Company. This amount varies by
group but in no event will this amount exceed $10,000. You may not increase the
Face Amount after the Insured reaches Age 80. An increase must be accompanied by
an additional premium if the Certificate Value is less than $50 plus an amount
equal to the sum of two Monthly Deductions. On the effective date of each
increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. A surrender charge
will also be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and (2)
during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
DECREASES
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the
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decrease may be limited or Certificate Value may be returned to the Certificate
Owner (at your election) to the extent necessary to meet the requirements. A
return of Certificate Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined.
Certificate Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the General Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Certificate.
CALCULATION OF CERTIFICATE VALUE
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
CERTIFICATE -- "Enrollment Form for a Certificate") less any Monthly Deductions
due. On each Valuation Date after the Date of Issue the Certificate Value will
be:
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
determined for each Sub-Account by multiplying the value of a Unit in that
Sub-Account on that date by the number of such Units allocated to the
Certificate; PLUS
(2) the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
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Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
THE UNIT
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any; and
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period.
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor.
Allocations to the General Account are not converted into Units, but are
credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
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SURRENDER
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PAID-UP INSURANCE OPTION
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING CERTIFICATE OWNER
RIGHTS AND BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit will be computed
differently from the net Death Benefit and the Death Benefit options will
not apply.
- We will not allow transfers of Certificate Value from the General Account
back to the Separate Account.
- You may not make further payments.
- You may not increase or decrease the Face Amount or make partial
withdrawals.
- Riders will continue only with our consent.
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
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PARTIAL WITHDRAWAL
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal." The Company will normally pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments." For important tax consequences which may result from partial
withdrawals, see FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. Upon
request, the Company may permit all or part of the Premium Expense Charge to be
deducted as part of the Monthly Deductions. The premium tax charge may change
when either the applicable jurisdiction changes or the tax rate within the
applicable jurisdiction changes. The Company should be notified of any change in
address of the Insured as soon as possible.
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 10%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
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MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See "Charge for Change in Face
Amount."
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insured who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the Face Amount. Because the cost of insurance depends
upon a number of variables, it can vary from month to month and from group to
group.
CALCULATION OF THE CHARGE
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Minimum Death Benefit is not in effect.
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit Option
1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face Amount
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reduced by any Certificate Value (minus rider charges) in excess of the initial
Face Amount at the beginning of the Certificate month.
If the Minimum Death Benefit is in effect under any Option, a monthly cost of
insurance charge will also be calculated for that portion of the Death Benefit
which exceeds the current Face Amount. This charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Minimum Death Benefit (Certificate Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Certificate Value under Death
Benefit Option 1 or Option 3, or
- the Face Amount plus the Certificate Value under Death Benefit Option 2.
When the Minimum Death Benefit is in effect, the cost of insurance charge for
the initial Face Amount and for any increases will be calculated as set forth in
the preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: Decreases."
COST OF INSURANCE RATES
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a guaranteed
or simplified underwriting basis. The amount of this portion will be determined
for each group, and may vary based on characteristics within the group.
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; the number of
persons eligible to participate in the plan; expected percentage of eligible
persons participating in the plan; and the amount of guaranteed or simplified
underwriting insurance to be issued. Larger groups, higher participation rates
and occupations with historically favorable mortality rates will generally
result in the individuals within that group being placed in a more favorable
Underwriting Class.
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and
non-smokers. Any change in the cost of insurance rates will apply to all persons
of the same insuring Age and Underwriting Class whose Certificates have been in
force for the same length of time.
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will have a lower cost of insurance than an Insured in a standard Underwriting
Class who, in turn, will have a lower cost of insurance than an Insured in a
substandard Underwriting Class with a higher mortality risk. The Underwriting
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Classes may be divided into two categories or aggregated: smokers and
non-smokers. Non-smoking Insureds will incur lower cost of insurance rates than
Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts 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, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. 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 costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current 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.
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CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
Because the Sub-Accounts purchase shares of the Underlying Investment Companies,
the value of the Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Investment Companies. The
prospectuses and Statements of Additional Information of the Trust, MFVAT, DGPF,
and T. Rowe Price contain additional information concerning such fees and
expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
SURRENDER CHARGE
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance of the Certificate is an amount up to the sum of (a) plus (b), where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of up to 50% (less
any premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. This reduction in the maximum
surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
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The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES, for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of
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withdrawal (i.e., 15 years have passed from the Date of Issue and from the
effective date of any increase in the Face Amount).
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
TRANSFER CHARGES
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Account which invests in the Money
Market Fund of the Trust, respectively, to one or more of the other
Sub-Accounts, or (b) to reallocate Certificate Value among the Sub-Accounts. The
first automatic transfer counts as one transfer towards the twelve free
transfers allowed in each Certificate year. Each subsequent automatic transfer
is without charge and does not reduce the remaining number of transfers which
may be made without charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account will be free of charge, and in addition to the twelve free transfers in
a Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and
CERTIFICATE LOANS.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
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CERTIFICATE LOANS
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments."
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The current
credited rate is 7.1%, 8% for preferred loans. NO ADDITIONAL INTEREST WILL BE
CREDITED TO SUCH CERTIFICATE VALUE.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth Certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. The
Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the loan amount, if the new loan amount
exceeds the Certificate Value in the General Account, the Company will transfer
Certificate Value equal to that excess loan amount from the Certificate Value in
each Sub-Account to the General Account as security for the excess loan amount.
The Company will allocate the amount transferred among the Sub-Accounts in the
same proportion that the Certificate Value in each Sub-Account bears to the
total Certificate Value in all Sub-Accounts.
REPAYMENT OF DEBT
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate Account cannot exceed Certificate Value previously transferred from
the Separate Account to secure the Debt.
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If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
EFFECT OF CERTIFICATE LOANS
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
CERTIFICATE TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Certificate to lapse
unless:
- the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued; or
- if Debt exceeds the Certificate Value.
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
PAYOR PROVISIONS
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of premium which is due.
The premium may be paid during a grace period of 62 days, beginning on the
premium due date. If the necessary premium is not received by the Company within
31 days of the end of the grace period, a second notice will be sent to the
Payor. A 31-day grace period notice at this time will also be sent to you if the
Certificate Value is insufficient to cover the Monthly Deductions then due.
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If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
REINSTATEMENT
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
- a written enrollment form for reinstatement,
- Evidence of Insurability; and
- a premium that, after the deduction of the premium expense charge, is
large enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
CERTIFICATE VALUE ON REINSTATEMENT
The Certificate Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Certificate increased by interest
from the date the payment was received at the Principal Office; PLUS
- an amount equal to the Certificate Value less Debt on the date of default;
MINUS
- the Monthly Deduction due on the date of reinstatement. You may reinstate
any Debt outstanding on the date of default or foreclosure.
OTHER CERTIFICATE PROVISIONS
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
CERTIFICATE OWNER
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while
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the Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
is required whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
ASSIGNMENT
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
INCONTESTABILITY
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Certificate,
without interest, less any outstanding Debt and less any partial withdrawals. If
the Insured commits suicide, while sane or insane, within two years from the
effective date of any increase in the Death Benefit, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.
AGE
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers may be postponed whenever: (1) the New York
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Stock Exchange is closed other than customary weekend and holiday closings, or
trading on the New York Stock Exchange is restricted as determined by the SEC,
or (2) an emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the Separate Account's net assets.
Payments under the Certificate of any amounts derived from the premiums paid by
check may be delayed until such time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Assistant Secretary (since 1992),
Director and Vice President (since 1984) of First Allmerica
Abigail M. Armstrong Secretary (since 1996), and Counsel (since 1991) of
Secretary and Counsel First Allmerica
Warren E. Barnes Vice President and Corporate Controller (since 1998) of
Vice President and Corporate First Allmerica; Vice President and Controller (since
Controller 1997) of First Allmerica; Vice President and Assistant
Controller (1996 to 1997) of First Allmerica; Assistant
Vice President and Assistant Controller (1995 to 1996)
of First Allmerica; Assistant Vice President Corporate
Accounting and Reporting (1993 to 1995) of First
Allmerica
Robert E. Bruce Director and Chief Information Officer (since 1997),Vice
Director, Vice President and President (since 1995) of First Allmerica; Corporate
Chief Information Officer Manager (1979 to 1995) of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and
Director, Vice President and Vice President (since 1991) of First Allmerica
Chief Investment Officer
John F. Kelly Director (since 1996), General Counsel (since 1981),
Director, Vice President and Senior Vice President and Assistant Secretary (since
General Counsel 1986) of First Allmerica
J. Barry May Director and President (since 1996) of First Allmerica;
Director Vice President (1993 to 1996), and General Manager (1989
to 1993) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994), and CEO (since
1996) of Citizens Insurance Company of America; Vice
President (1982 to 1994) and Chief Investment Officer
(1986 to 1994) of First Allmerica
John F. O'Brien Director, Chairman of the Board, President and Chief
Director and Chairman of the Executive Officer (since 1989) of First Allmerica
Board
Edward J. Parry, III Director and Chief Financial Officer (since 1996), and
Director, Vice President, Vice President and Treasurer (since 1993) of First
Treasurer, and Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996), Vice President (since 1990), of
Director, President and First Allmerica; Director (since 1990) of Allmerica
Chief Executive Officer Investments, Inc.; and Director and President (since
1990) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998) of
Travelers Property & Casualty Group; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996), Vice President (since 1990), and
Director and Vice President Chief Financial Officer (1990 to 1996) of First
Allmerica
Phillip E. Soule Director (since 1996), and Vice President (since 1987)
Director of First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Certificates pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer and is
a member of the National Association of Securities Dealers ("NASD"). The
Certificates are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc. or of independent broker-dealers.
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issuance of a
Certificate or an increase in Face Amount, commissions may be up to 25% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 2.5% of first-year,
or 4% of renewal premiums. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales related
criteria. Other payments may be made for other services that do not directly
involve the sales of the Certificates. These services may include the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the T. Rowe Price International Stock Portfolio, at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Separate Account.
The Company may in the future render
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services for which it will receive compensation from the investment advisers or
other service providers of other Underlying Funds.
REPORTS
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you. The annual
statement will summarize all of the above transactions and deductions of charges
during the Certificate year. It will also set forth the status of the Death
Proceeds, Certificate Value, Surrender Value, amounts in the Sub-Accounts and
General Account, and any Certificate loan(s).
In addition, you will be sent periodic reports containing financial statements
and other information for the Separate Account and the Underlying Investment
Companies as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
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 from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, and the financial
statements for the Group VEL Account as of December 31, 1997 and for the periods
indicated, included in this Prospectus 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
Certificates.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
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<PAGE>
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account. Based on these expectations,
no charge is made for federal income taxes which may be attributable to the
Separate Account.
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE CERTIFICATES
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See "Modified Endowment Contracts."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
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CERTIFICATE LOANS
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may revoke your
request for a preferred loan.
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax deduction for interest is allowed on policy or certificate loans, if the
insured is an officer or employee of, or is financially interested in, any
business carried on by the taxpayer. There is an exception to this rule which
permits a deduction for interest on loans up to $50,000 related to any policies
or certificates covering the greater of (1) five individuals, or (2) the lesser
of (a) 5% of the total number of officers and employees of the corporation, or
(b) 20 individuals.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level premiums.
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any 12-month period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the
51
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Certificate and the General Account may, however, be subject to certain
generally applicable provisions of the Federal Securities Laws concerning the
accuracy and completeness of statements made in prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General Account, plus interest at the
Guaranteed Minimum Rate, plus any excess interest which the Company credits,
less the sum of all Certificate charges allocable to the General Account and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
THE CERTIFICATE
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CERTIFICATE LOANS
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate.
52
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Partial withdrawals are made on a last-in/first-out basis from Certificate Value
allocated to the General Account.
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
Certificate loans may also be made from the Certificate Value in the General
Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
YEAR 2000 DISCLOSURE
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
affiliates have incurred and expensed
53
<PAGE>
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 Company's contingency plans related to the Year 2000 issue are addressed in
a plan developed jointly with an outside vendor. The plan contains immediate
steps to keep business functions operating while unforeseen Year 2000 issues are
being addressed. It outlines responses to situations that may affect critical
business functions and also provides triage guidance, a documented order of
actions to respond to problems. During the triage process, business priorities
are established and "Critical Points of Failure" are identified as having a
significant impact on the business. The Company's contingency plans are designed
to keep a business unit's operation functioning in the event of a failure or
delay due to Year 2000 record format and date calculation changes.
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.
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Separate Account are included
in this Prospectus beginning immediately after the Appendices. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account. The financial statements
for the Sub-Accounts investing in the Funds of the Trust, MFVAT, DGPF and T.
Rowe Price are not included because sales have not yet begun.
54
<PAGE>
APPENDIX A
OPTIONAL BENFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. The following supplemental benefits are
available for issue under the Certificates for an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that, during periods of total disability continuing for more
than the period of time specified in the Rider, the Company will add to the
Certificate Value each month an amount selected by you or the amount necessary
to maintain the Certificate in force, whichever is greater. This benefit is
subject to the Company's maximum issue benefits. Its cost may change yearly.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present, this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "Other Insured" to
convert the coverage to a flexible premium adjustable life insurance
Certificate.
CHILDREN'S INSURANCE RIDER
This Rider provides coverage for eligible minor children. It also covers future
children, including adopted children and stepchildren.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Certificate anniversary nearest the Insured's Age 70.
OPTION TO ACCELERATE BENEFITS RIDER
This Rider permits part of the proceeds of the Certificate to be available
before death if the Insured becomes terminally ill and, depending on the group
to which the Policy is issued, may also pay part of the proceeds if the Insured
is permanently confined to a nursing home.
EXCHANGE OPTION RIDER
This Rider allows you to use the Certificate to insure a different person,
subject to Company guidelines.
EXCHANGE TO TERM INSURANCE RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An exchange
credit will be paid to the Certificate Owner or the corporate assignee in the
case of a corporate-sponsored collateral assignment split dollar arrangement.
CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL STATES.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options then offered by the
Company. If you do not make an election, the Company will pay the benefits in a
single sum. A certificate will be provided to the payee describing the payment
option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that otherwise would be deducted from the Death Benefit.
The amounts payable under a payment option are paid from the General Account.
These amounts are not based on the investment experience of the Separate
Account.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
B-1
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Certificate's Sum Insured and
Certificate Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Certificate issued to a person, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Certificate
issued to a person, Age 45, under a standard Premium Class and qualifying for
the non-smoker discount. The tables illustrate the guaranteed cost of insurance
rates and the current cost of insurance rates as presently in effect.
The tables illustrate the Certificate Values that would result based upon the
assumptions that no Certificate loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Certificate year (so that no transaction or transfer charges have been
incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested each year to earn interest (after taxes) at 5%
compounded annually.
The Certificate Values and Death Proceeds would be different from those shown if
the gross annual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below such averages for individual
Certificate years. The values would also be different depending on the
allocation of a Certificate's total Certificate Value among the Sub-Accounts of
the Separate Account, if the actual rates of return averaged 0%, 6% or 12%, but
the rates of each Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Certificate Values take into
account the deduction from premium for the tax expense charge, the Monthly
Deduction from Certificate Value, and the daily charge against the Separate
Account for mortality and expense risks. In both the Current Cost of Insurance
Charges tables and the Guaranteed Cost of Insurance Charges tables, the Separate
Account charge for morality and expense risks is equivalent to an effective
annual rate of 0.90% of the average daily value of the assets in the Separate
Account attributable to the Certificates.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary and, in 1997, ranged from an annual
rate of 0.35% to an annual rate of 1.11% of average daily net assets. The fees
and expenses associated with the Certificate may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of the Certificate Value
among the Sub-Accounts.
Reflects current waiver arrangements as of fiscal year ended August 31, 1997 to
maintain Total Fund Expenses at the levels indicated above. Absent such waivers,
the Advisory Fees for the MFVAT International Equity, MFVAT Capital Growth,
MFVAT Growth and Income, MFVAT Asset Allocation and MFVAT U.S. Government Income
Portfolios would be 0.80%, 0.60%, 0.60%, 0.55% and 0.50%, respectively, and
Total
C-1
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Fund Expenses for the MFVAT International Equity, MFVAT Capital Growth, MFVAT
Growth and Income, MFVAT Asset Allocation and MFVAT U.S. Government Income
Portfolios would be 2.99%, 1.70%, 1.70%, 2.03% and 1.50%.
Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through April 30, 1999. The fee ratios shown above have been adjusted to assume
that the new voluntary limitation took effect on January 1, 1997. In 1997, the
actual ratio of total annual expenses of the International Equity Series was
0.85%, and the actual management fee ratio was 0.70%.
AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.25% for the Select Value Opportunity Fund, 1.20% for the Select Growth Fund,
1.00% for the Investment Grade Income Fund and 0.60% for the Money Market Fund
and Equity Index Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1997. These
limitations may be terminated at any time.
NET ANNUAL RATES OF INVESTMENT
Taking into account the 0.90% charge to the Separate Account and the assumed
0.85% charge for Underlying Investment Company advisory fees and operating
expenses, the gross annual rates of investment return of 0%, 6% and 12%
correspond to net annual rates of -1.75%, 4.25%, and 10.25%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-2
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 117 3,502 250,000 346 3,731 250,000 575 3,960 250,000
2 9,041 3,060 6,914 250,000 3,738 7,591 250,000 4,443 8,297 250,000
3 13,903 8,104 10,236 250,000 9,454 11,585 250,000 10,917 13,048 250,000
4 19,008 12,398 13,464 250,000 14,650 15,715 250,000 17,189 18,254 250,000
5 24,368 16,601 16,601 250,000 19,987 19,987 250,000 23,963 23,963 250,000
6 29,996 19,644 19,644 250,000 24,405 24,405 250,000 30,225 30,225 250,000
7 35,906 22,587 22,587 250,000 28,967 28,967 250,000 37,092 37,092 250,000
8 42,112 25,431 25,431 250,000 33,682 33,682 250,000 44,631 44,631 250,000
9 48,627 28,174 28,174 250,000 38,554 38,554 250,000 52,913 52,913 250,000
10 55,469 30,814 30,814 250,000 43,587 43,587 250,000 62,015 62,015 250,000
11 62,652 33,346 33,346 250,000 48,784 48,784 250,000 72,024 72,024 250,000
12 70,195 35,735 35,735 250,000 54,122 54,122 250,000 83,013 83,013 250,000
13 78,114 37,977 37,977 250,000 59,604 59,604 250,000 95,092 95,092 250,000
14 86,430 40,076 40,076 250,000 65,244 65,244 250,000 108,392 108,392 250,000
15 95,161 42,024 42,024 250,000 71,043 71,043 250,000 123,054 123,054 250,000
16 104,330 43,806 43,806 250,000 77,002 77,002 250,000 139,236 139,236 250,000
17 113,956 45,448 45,448 250,000 83,155 83,155 250,000 157,139 157,139 250,000
18 124,064 46,935 46,935 250,000 89,504 89,504 250,000 176,971 176,971 250,000
19 134,677 48,253 48,253 250,000 96,054 96,054 250,000 198,970 198,970 250,000
20 145,821 49,388 49,388 250,000 102,813 102,813 250,000 223,318 223,318 272,448
Age 60 95,161 42,024 42,024 250,000 71,043 71,043 250,000 123,054 123,054 250,000
Age 65 145,821 49,388 49,388 250,000 102,813 102,813 250,000 223,318 223,318 272,448
Age 70 210,477 51,357 51,357 250,000 139,910 139,910 250,000 386,429 386,429 448,257
Age 75 292,995 44,916 44,916 250,000 184,625 184,625 250,000 649,162 649,162 694,604
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-3
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 2,753 250,000 0 2,946 250,000 0 3,139 250,000
2 9,041 1,553 5,406 250,000 2,111 5,964 250,000 2,693 6,547 250,000
3 13,903 5,826 7,957 250,000 6,924 9,055 250,000 8,117 10,248 250,000
4 19,008 9,333 10,399 250,000 11,149 12,214 250,000 13,202 14,267 250,000
5 24,368 12,732 12,732 250,000 15,444 15,444 250,000 18,638 18,638 250,000
6 29,996 14,953 14,953 250,000 18,742 18,742 250,000 23,393 23,393 250,000
7 35,906 17,049 17,049 250,000 22,098 22,098 250,000 28,561 28,561 250,000
8 42,112 19,010 19,010 250,000 25,507 25,507 250,000 34,180 34,180 250,000
9 48,627 20,825 20,825 250,000 28,957 28,957 250,000 40,290 40,290 250,000
10 55,469 22,479 22,479 250,000 32,437 32,437 250,000 46,932 46,932 250,000
11 62,652 23,964 23,964 250,000 35,942 35,942 250,000 54,164 54,164 250,000
12 70,195 25,271 25,271 250,000 39,464 39,464 250,000 62,049 62,049 250,000
13 78,114 26,389 26,389 250,000 42,996 42,996 250,000 70,660 70,660 250,000
14 86,430 27,311 27,311 250,000 46,535 46,535 250,000 80,085 80,085 250,000
15 95,161 28,024 28,024 250,000 50,072 50,072 250,000 90,419 90,419 250,000
16 104,330 28,499 28,499 250,000 53,585 53,585 250,000 101,765 101,765 250,000
17 113,956 28,715 28,715 250,000 57,058 57,058 250,000 114,248 114,248 250,000
18 124,064 28,633 28,633 250,000 60,461 60,461 250,000 128,007 128,007 250,000
19 134,677 28,203 28,203 250,000 63,756 63,756 250,000 143,205 143,205 250,000
20 145,821 27,381 27,381 250,000 66,909 66,909 250,000 160,046 160,046 250,000
Age 60 95,161 28,024 28,024 250,000 50,072 50,072 250,000 90,419 90,419 250,000
Age 65 145,821 27,381 27,381 250,000 66,909 66,909 250,000 160,046 160,046 250,000
Age 70 210,477 15,839 15,839 250,000 79,494 79,494 250,000 277,046 277,046 321,374
Age 75 292,995 0 0 250,000 81,287 81,287 250,000 465,877 465,877 498,488
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER, AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 297 1,221 76,221 375 1,299 76,299 453 1,377 76,377
2 3,014 1,370 2,420 77,420 1,602 2,652 77,652 1,844 2,894 77,894
3 4,634 3,107 3,596 78,596 3,572 4,062 79,062 4,076 4,566 79,566
4 6,336 4,505 4,750 79,750 5,284 5,529 80,529 6,162 6,406 81,406
5 8,123 5,881 5,881 80,881 7,055 7,055 82,055 8,432 8,432 83,432
6 9,999 6,989 6,989 81,989 8,644 8,644 83,644 10,663 10,663 85,663
7 11,969 8,073 8,073 83,073 10,296 10,296 85,296 13,118 13,118 88,118
8 14,037 9,135 9,135 84,135 12,013 12,013 87,013 15,820 15,820 90,820
9 16,209 10,172 10,172 85,172 13,798 13,798 88,798 18,793 18,793 93,793
10 18,490 11,185 11,185 86,185 15,653 15,653 90,653 22,064 22,064 97,064
11 20,884 12,174 12,174 87,174 17,579 17,579 92,579 25,664 25,664 100,664
12 23,398 13,138 13,138 88,138 19,580 19,580 94,580 29,625 29,625 104,625
13 26,038 14,077 14,077 89,077 21,658 21,658 96,658 33,983 33,983 108,983
14 28,810 14,991 14,991 89,991 23,814 23,814 98,814 38,779 38,779 113,779
15 31,720 15,881 15,881 90,881 26,054 26,054 101,054 44,057 44,057 119,057
16 34,777 16,744 16,744 91,744 28,377 28,377 103,377 49,865 49,865 124,865
17 37,985 17,581 17,581 92,581 30,789 30,789 105,789 56,256 56,256 131,256
18 41,355 18,391 18,391 93,391 33,290 33,290 108,290 63,290 63,290 138,290
19 44,892 19,174 19,174 94,174 35,884 35,884 110,884 71,031 71,031 146,031
20 48,607 19,930 19,930 94,930 38,574 38,574 113,574 79,550 79,550 154,550
Age 60 97,665 25,579 25,579 100,579 71,167 71,167 146,167 229,232 229,232 307,170
Age 65 132,771 26,546 26,546 101,546 91,516 91,516 166,516 378,078 378,078 461,255
Age 70 177,576 25,538 25,538 100,538 114,403 114,403 189,403 617,130 617,130 715,870
Age 75 234,759 21,566 21,566 96,566 139,063 139,063 214,063 1,001,956 1,001,956 1,076,956
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 116 1,040 76,040 184 1,108 76,108 252 1,176 76,176
2 3,014 1,010 2,060 77,060 1,211 2,261 77,261 1,421 2,471 77,471
3 4,634 2,570 3,059 78,059 2,971 3,461 78,461 3,407 3,896 78,896
4 6,336 3,794 4,038 79,038 4,464 4,709 79,709 5,219 5,464 80,464
5 8,123 4,994 4,994 79,994 6,003 6,003 81,003 7,186 7,186 82,186
6 9,999 5,929 5,929 80,929 7,348 7,348 82,348 9,080 9,080 84,080
7 11,969 6,841 6,841 81,841 8,743 8,743 83,743 11,161 11,161 86,161
8 14,037 7,729 7,729 82,729 10,190 10,190 85,190 13,448 13,448 88,448
9 16,209 8,592 8,592 83,592 11,688 11,688 86,688 15,958 15,958 90,958
10 18,490 9,430 9,430 84,430 13,239 13,239 88,239 18,715 18,715 93,715
11 20,884 10,242 10,242 85,242 14,845 14,845 89,845 21,742 21,742 96,742
12 23,398 11,026 11,026 86,026 16,505 16,505 91,505 25,066 25,066 100,066
13 26,038 11,784 11,784 86,784 18,222 18,222 93,222 28,716 28,716 103,716
14 28,810 12,512 12,512 87,512 19,996 19,996 94,996 32,724 32,724 107,724
15 31,720 13,214 13,214 88,214 21,830 21,830 96,830 37,127 37,127 112,127
16 34,777 13,884 13,884 88,884 23,723 23,723 98,723 41,962 41,962 116,962
17 37,985 14,524 14,524 89,524 25,678 25,678 100,678 47,272 47,272 122,272
18 41,355 15,132 15,132 90,132 27,694 27,694 102,694 53,105 53,105 128,105
19 44,892 15,707 15,707 90,707 29,772 29,772 104,772 59,511 59,511 134,511
20 48,607 16,248 16,248 91,248 31,914 31,914 106,914 66,549 66,549 141,549
Age 60 97,665 19,035 19,035 94,035 56,455 56,455 131,455 188,542 188,542 263,542
Age 65 132,771 17,687 17,687 92,687 70,077 70,077 145,077 308,053 308,053 383,053
Age 70 177,576 12,953 12,953 87,953 82,821 82,821 157,821 498,045 498,045 577,733
Age 75 234,759 2,812 2,812 77,812 91,847 91,847 166,847 799,735 799,735 874,735
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 7,819 12,101 250,000 8,573 12,855 250,000 9,328 13,610 250,000
2 28,327 18,514 23,981 250,000 20,783 26,249 250,000 23,142 28,608 250,000
3 43,561 33,511 35,643 250,000 38,075 40,206 250,000 43,012 45,144 250,000
4 59,557 46,024 47,090 250,000 53,687 54,753 250,000 62,312 63,378 250,000
5 76,353 58,328 58,328 250,000 69,919 69,919 250,000 83,496 83,496 250,000
6 93,989 69,361 69,361 250,000 85,735 85,735 250,000 105,644 105,644 283,126
7 112,506 80,190 80,190 250,000 102,199 102,199 265,718 129,927 129,927 337,810
8 131,950 90,823 90,823 250,000 119,264 119,264 300,544 156,548 156,548 394,500
9 152,365 101,260 101,260 250,000 136,947 136,947 334,151 185,727 185,727 453,174
10 173,801 111,447 111,447 264,129 155,263 155,263 367,972 217,698 217,698 515,944
11 196,309 121,383 121,383 279,180 174,227 174,227 400,723 252,718 252,718 581,252
12 219,943 131,047 131,047 292,234 193,825 193,825 432,230 291,020 291,020 648,976
13 244,758 140,443 140,443 303,356 214,070 214,070 462,391 332,900 332,900 719,063
14 270,814 149,574 149,574 314,106 234,979 234,979 493,456 378,681 378,681 795,230
15 298,173 158,442 158,442 323,221 256,560 256,560 523,383 428,705 428,705 874,558
16 326,899 167,034 167,034 332,397 278,806 278,806 554,824 483,309 483,309 961,786
17 357,062 175,392 175,392 338,506 301,792 301,792 582,459 543,013 543,013 1,048,014
18 388,733 183,504 183,504 344,988 325,512 325,512 611,962 608,230 608,230 1,143,473
19 421,988 191,373 191,373 350,212 349,978 349,978 640,460 679,448 679,448 1,243,390
20 456,905 199,001 199,001 354,222 375,208 375,208 667,870 757,203 757,203 1,347,822
Age 60 298,173 158,442 158,442 323,221 256,560 256,560 523,383 428,705 428,705 874,558
Age 65 456,905 199,001 199,001 354,222 375,208 375,208 667,870 757,203 757,203 1,347,822
Age 70 659,493 233,170 233,170 368,408 512,264 512,264 809,378 1,263,379 1,263,379 1,996,139
Age 75 918,052 261,171 261,171 370,863 668,454 668,454 949,205 2,035,561 2,035,561 2,890,497
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 6,199 10,481 250,000 6,864 11,146 250,000 7,529 11,811 250,000
2 28,327 15,289 20,755 250,000 17,279 22,745 250,000 19,349 24,815 250,000
3 43,561 28,696 30,827 250,000 32,688 34,820 250,000 37,011 39,142 250,000
4 59,557 39,630 40,695 250,000 46,325 47,391 250,000 53,867 54,933 250,000
5 76,353 50,367 50,367 250,000 60,487 60,487 250,000 72,352 72,352 250,000
6 93,989 59,846 59,846 250,000 74,136 74,136 250,000 91,581 91,581 250,000
7 112,506 69,129 69,129 250,000 88,363 88,363 250,000 112,659 112,659 292,913
8 131,950 78,216 78,216 250,000 103,169 103,169 259,985 135,664 135,664 341,873
9 152,365 87,108 87,108 250,000 118,432 118,432 288,973 160,757 160,757 392,246
10 173,801 95,804 95,804 250,000 134,145 134,145 317,924 188,095 188,095 445,786
11 196,309 104,310 104,310 250,000 150,314 150,314 345,721 217,869 217,869 501,098
12 219,943 112,590 112,590 251,075 166,942 166,942 372,281 250,279 250,279 558,122
13 244,758 120,601 120,601 260,497 184,038 184,038 397,522 285,551 285,551 616,791
14 270,814 128,339 128,339 269,512 201,596 201,596 423,351 323,907 323,907 680,204
15 298,173 135,810 135,810 277,053 219,621 219,621 448,027 365,602 365,602 745,828
16 326,899 142,995 142,995 284,560 238,081 238,081 473,781 410,847 410,847 817,585
17 357,062 149,915 149,915 289,336 257,002 257,002 496,013 459,970 459,970 887,742
18 388,733 156,546 156,546 294,306 276,338 276,338 519,516 513,195 513,195 964,807
19 421,988 162,882 162,882 298,073 296,065 296,065 541,800 570,795 570,795 1,044,555
20 456,905 168,923 168,923 300,683 316,170 316,170 562,783 633,082 633,082 1,126,886
Age 60 298,173 135,810 135,810 277,053 219,621 219,621 448,027 365,602 365,602 745,828
Age 65 456,905 168,923 168,923 300,683 316,170 316,170 562,783 633,082 633,082 1,126,886
Age 70 659,493 194,665 194,665 307,570 421,521 421,521 666,003 1,026,306 1,026,306 1,621,563
Age 75 918,052 213,176 213,176 302,710 532,761 532,761 756,520 1,591,643 1,591,643 2,260,133
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-8
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge may be calculated upon issuance of the Certificate
and upon each increase in the Face Amount. The maximum surrender charge
calculated upon issuance of the Certificate is equal to $8.50 per thousand
dollars of the initial Face Amount plus up to 50% (less any premium expense
charge not associated with state and local premium taxes) of the Guideline
Annual Premium, depending on the group to which the Policy is issued. The
maximum surrender charge for an increase in the Face Amount is $8.50 per
thousand dollars of increase, plus up to 50% (less any premium expense charge
not associated with state and local premium taxes) of the Guideline Annual
Premium for the increase. The calculation may be summarized in the following
formula:
Maximum Surrender Charge = (8.5 X Face Amount) + (up to 50% X Guideline Annual
Premium)
1000
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Certificate and upon
each increase in the Face Amount are shown in the following table. During the
first two Certificate years following issue or an increase in Face Amount, the
actual surrender charge may be less than the maximum. See CHARGES AND DEDUCTIONS
- -- "Surrender Charge."
The maximum surrender charge remains level for up to the first 24 Certificate
months, reduced uniformly for the balance of the surrender charge period, and is
zero thereafter. The actual surrender charge imposed may be less than the
maximum.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Underwriting Class as indicated in the following table.
D-1
<PAGE>
MAXIMUM SURRENDER CHARGE PER $1000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at Age at
issue or Unisex Unisex Unisex issue or Unisex Unisex Unisex
increase Nonsmoker Smoker Uni-smoker Increase Nonsmoker Smoker Uni-smoker
- --------- ------------- ----------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 14.89 14.37 41 27.74 32.73 29.39
1 14.84 14.31 42 28.55 33.79 30.27
2 15.00 14.44 43 29.41 34.91 31.19
3 15.17 14.58 44 30.31 36.08 32.17
4 15.35 14.73 45 31.26 37.31 33.19
5 15.53 14.88 46 32.27 38.60 34.27
6 15.73 15.05 47 33.33 39.95 35.40
7 15.94 15.23 48 34.46 41.38 36.59
8 16.16 15.41 49 35.64 42.89 37.86
9 16.39 15.61 50 36.90 44.48 39.19
10 16.64 15.82 51 38.24 46.17 40.60
11 16.91 16.05 52 39.66 47.95 42.10
12 17.18 16.28 53 41.17 49.84 43.68
13 17.47 16.52 54 42.76 51.82 45.36
14 17.77 16.77 55 44.46 53.91 47.12
15 18.08 17.02 56 46.25 56.11 48.98
16 18.38 17.28 57 48.16 56.87 50.95
17 18.67 17.54 58 50.18 56.76 53.03
18 17.15 18.98 17.80 59 52.34 56.65 55.24
19 17.40 19.29 18.07 60 54.64 56.54 56.71
20 17.65 19.62 18.35 61 56.54 56.44 56.59
21 17.92 19.95 18.64 62 56.41 56.34 56.47
22 18.20 20.31 18.95 63 56.29 56.26 56.36
23 18.49 20.68 19.27 64 56.16 56.18 56.25
24 18.80 21.08 19.61 65 56.03 56.10 56.13
25 19.13 21.49 19.97 66 55.90 56.01 56.00
26 19.48 21.94 20.35 67 55.74 55.90 55.85
27 19.85 22.42 20.75 68 55.58 55.76 55.70
28 20.24 22.92 21.18 69 55.41 55.63 55.53
29 20.65 23.45 21.63 70 55.27 55.49 55.37
30 21.08 24.02 22.11 71 55.12 55.38 55.22
31 21.54 24.62 22.61 72 54.96 55.29 55.10
32 22.03 25.25 23.15 73 54.85 55.23 54.99
33 22.54 25.92 23.71 74 54.75 55.19 54.89
34 23.03 26.62 24.30 75 54.64 55.16 54.80
35 23.64 27.36 24.92 76 54.52 55.10 54.69
36 24.24 28.15 25.57 77 54.36 55.01 54.53
37 24.87 28.97 26.26 78 54.18 54.86 54.35
38 25.53 29.84 26.99 79 53.97 54.68 54.14
39 26.23 30.76 27.75 80 53.75 54.49 53.91
40 26.97 31.72 28.55
</TABLE>
D-2
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a unisex, Age 35 non-smoker
purchases a $100,000 Certificate. In this example the Guideline Annual Premium
("GAP") equals $1,032.25. The maximum surrender charge is calculated as follows:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $516.13
(50% X GAP)
-----------------------
$1,366.13
Maximum surrender charge per Table (23.64 X 100) $2,364.00
During the first two Certificate years after the Date of Issue, the actual
surrender charge is the smaller of the maximum surrender charge and the
following sum:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(not to exceed 30% of premiums received,
up to one GAP, plus 9% of premiums
received in excess of one GAP)
--------------------
Sum of (1) and (2)
The maximum surrender charge is $1,366.13. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
EXAMPLE 1:
Assume the Certificate Owner surrenders the Certificate in the 10th Certificate
month, having paid total premiums of $900. The actual surrender charge would be
$1,120.
EXAMPLE 2:
Assume the Certificate Owner surrenders the Certificate in the 120th Certificate
month. Also assume that after the 24th Certificate month, the maximum surrender
charge decreases by 1/156 per month, thereby reaching zero at the end of the
15th Certificate year. In this example, the maximum surrender charge would be
$525.43.
D-3
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
----------------------------------------------- ------- ------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums................................... $ -- $ 7.0 $ 0.4 $ 23.3
Universal life and investment product
policy fees.............................. 67.7 55.0 195.7 156.4
Net investment income...................... 38.7 41.5 113.5 125.8
Net realized investment gains (losses)..... (2.7) 0.2 19.5 (2.9)
Other income............................... 0.4 0.2 0.3 0.6
------- ------- --------- ---------
Total revenues......................... 104.1 103.9 329.4 303.2
------- ------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 32.7 48.9 114.5 147.2
Policy acquisition expenses................ 13.3 11.3 45.0 38.0
Sales practice litigation expense.......... 21.0 -- 21.0 --
Loss from cession of disability income
business................................. -- -- -- 53.9
Other operating expenses................... 22.6 24.0 72.5 71.6
------- ------- --------- ---------
Total benefits, losses and expenses.... 89.6 84.2 253.0 310.7
------- ------- --------- ---------
Income (loss) before federal income
taxes.................................... 14.5 19.7 76.4 (7.5)
------- ------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 1.5 14.6 19.0 5.9
Deferred................................... 1.7 (7.6) 5.9 (8.1)
------- ------- --------- ---------
Total federal income tax expense
(benefit)............................ 3.2 7.0 24.9 (2.2)
------- ------- --------- ---------
Net income (loss).............................. 11.3 12.7 51.5 (5.3)
OTHER COMPREHENSIVE (LOSS) INCOME
Net (depreciation) appreciation on available
for sale securities........................... (9.8) 13.1 (18.9) 21.7
Benefit (provision) for deferred federal income
taxes......................................... 3.4 (4.6) 6.6 (7.6)
------- ------- --------- ---------
Other comprehensive (loss) income...... (6.4) 8.5 (12.3) 14.1
------- ------- --------- ---------
Comprehensive income (loss) $ 4.9 $ 21.2 $ 39.2 $ 8.8
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 1998 1997
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period..... $ 2.5 $ 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 386.9 346.3
Issuance of common stock................... 8.0 --
--------- ---------
Balance at end of period................... 394.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4
Net income (loss).......................... 51.5 (5.3)
--------- ---------
Balance at end of period................... 264.6 171.1
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 38.5 20.5
Net (depreciation) appreciation on
available for sale securities............ (18.9) 21.7
Benefit (provision) for deferred federal
income taxes............................. 6.6 (7.6)
--------- ---------
Other comprehensive (loss) income...... (12.3) 14.1
--------- ---------
Balance at end of period................... 26.2 34.6
--------- ---------
Total shareholder's equity............. $ 688.2 $ 554.5
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER DECEMBER
30, 31,
(IN MILLIONS) 1998 1997
----------------------------------------------- ----------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized
cost of $1,266.5 and $1,340.5)............ $ 1,334.2 $ 1,402.5
Equity securities at fair value (cost of
$37.5 and $34.4).......................... 34.5 54.0
Mortgage loans............................. 227.1 228.2
Real estate................................ 3.9 12.0
Policy loans............................... 151.0 140.1
Other long term investments................ 19.5 20.3
----------- ----------
Total investments...................... 1,770.2 1,857.1
----------- ----------
Cash and cash equivalents.................... 137.1 31.1
Accrued investment income.................... 31.3 34.2
Deferred policy acquisition costs............ 903.3 765.3
Reinsurance receivables:
Future policy benefits..................... 265.4 242.5
Outstanding claims, losses and loss
adjustment expenses....................... 12.7 5.5
Unearned premiums.......................... 2.8 1.7
Other...................................... 31.5 1.4
----------- ----------
Total reinsurance receivables.......... 312.4 251.1
----------- ----------
Other assets................................. 36.0 10.7
Separate account assets 9,072.1 7,567.3
----------- ----------
Total assets........................... $ 12,262.4 $ 10,516.8
----------- ----------
----------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits..................... $ 2,241.0 $ 2,097.3
Outstanding claims, losses and loss
adjustment expenses....................... 18.8 18.5
Unearned premiums.......................... 2.8 1.8
Contractholder deposit funds and other
policy liabilities........................ 41.6 32.5
----------- ----------
Total policy liabilities and
accruals............................... 2,304.2 2,150.1
----------- ----------
Expenses and taxes payable................... 84.8 77.6
Reinsurance premiums payable................. 36.4 4.9
Short term debt.............................. -- --
Deferred federal income taxes................ 75.2 75.9
Separate account liabilities................. 9,073.6 7,567.3
----------- ----------
Total liabilities...................... 11,574.2 9,875.8
----------- ----------
Commitments and contingencies (Note 5)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,522 shares issued &
outstanding................................ 2.5 2.5
Additional paid in capital................... 394.9 386.9
Accumulated other comprehensive income....... 26.2 38.5
Retained earnings............................ 264.6 213.1
----------- ----------
Total shareholder's equity............. 688.2 641.0
----------- ----------
Total liabilities and shareholder's
equity................................. $ 12,262.4 $ 10,516.8
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 1998 1997
----------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 51.5 $ (5.3)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Net realized (gains) losses............ (19.5) 2.9
Net amortization and depreciation...... (5.9) 0.2
Sales practice litigation expense...... 21.0
Deferred federal income taxes.......... 5.9 (8.1)
Change in deferred acquisition costs... (140.1) (58.7)
Change in premiums and notes
receivable, net of reinsurance....... 31.3 --
Change in accrued investment income.... 2.9 (2.9)
Change in policy liabilities and
accruals, net........................ 154.2 (20.8)
Change in reinsurance receivable....... (61.3) (2.6)
Change in expenses and taxes payable... (3.5) (29.6)
Separate account activity, net......... 1.6 0.4
Other, net............................. (25.4) 0.4
----------- -----------
Net cash provided by (used in)
operating activities............. 12.7 (59.1)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities...... 145.9 602.2
Proceeds from disposals of equity
securities............................... 42.1 2.1
Proceeds from disposals of other
investments.............................. 12.5 19.4
Proceeds from mortgages matured or
collected................................ 55.3 40.5
Purchase of available-for-sale fixed
maturities............................... (77.6) (562.6)
Purchase of equity securities.............. (29.4) (1.9)
Purchase of other investments.............. (62.7) (41.1)
Other, net................................. (.7) --
----------- -----------
Net cash provided by investing
activities....................... 85.4 58.6
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common
stock.................................... 8.0 --
----------- -----------
Net cash provided by financing
activities....................... 8.0 --
----------- -----------
Net change in cash and cash equivalents........ 106.0 (0.5)
Cash and cash equivalents, beginning of
period........................................ 31.1 18.8
----------- -----------
Cash and cash equivalents, end of period....... $ 137.1 $ 18.3
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC"). The accompanying
unaudited consolidated financial statements of AFLIAC have been prepared in
accordance with generally accepted accounting principles for stock life
insurance companies for interim financial information.
The interim consolidated financial statements of AFLIAC include the accounts of
Somerset Square, Inc., a wholly owned non-insurance company. Somerset Square,
Inc. was transferred from SMAFCO effective November 30, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments, consisting of only normal
and recurring adjustments, necessary for a fair presentation of the financial
position and results of operations. Certain reclassifications have been made to
the 1997 consolidated statements of income in order to conform to the 1998
presentation. The results of operations for the third quarter and nine months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year. These financial statements should be read in
conjunction with the Company's 1997 Annual Audited Financial Statements.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted Statement No. 130 for the first quarter of 1998, resulting primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP No. 97-3"). SoP No. 97-3
provides guidance on when a liability should be recognized for guaranty fund and
other assessments and how to measure the liability. This statement allows for
the discounting of the liability if the amount and timing of the cash payments
are fixed and determinable. In addition, it provides criteria for when an asset
may be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use"
UF-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
("SoP No. 98-1"). SoP No. 98-1 requires that certain costs incurred in
developing internal-use computer software be capitalized and provides guidance
for determining whether computer software is to be considered for internal use.
This statement is effective for fiscal years beginning after December 15, 1998.
In the second quarter, the Company adopted SoP No. 98-1 effective January 1,
1998. The adoption of SoP No. 98-1 did not have a material effect on the results
of operations or financial position for the three months ended March 31, 1998.
Through the nine months ended September 30, 1998, the adoption of this SoP
resulted in an increase to pre-tax income of approximately $6.0 million.
3. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. This agreement did not have a
material effect on the Company's results of operations or financial position.
4. FEDERAL INCOME TAXES
Federal income tax expense for the periods ended September 30, 1998 and 1997,
has been computed using estimated effective tax rates. These rates are revised,
if necessary, at the end of each successive interim period to reflect the
current estimates of the annual effective tax rates.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 refiled the 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, AFC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation, of which $21.0 million was apportioned to AFLIAC. 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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
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.
UF-6
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity 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 Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- ------- -------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
------- -------
Total revenues......................... 403.5 377.9
------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
------- -------
Total benefits, losses and expenses.... 345.8 329.1
------- -------
Income before federal income taxes............. 57.7 48.8
------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
------- -------
Total federal income tax expense....... 21.0 17.1
------- -------
Net income..................................... $ 36.7 $ 31.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT 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
$1,340.5 and $1,660.2)............................ $ 1,402.5 $ 1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ---------
Total investments............................... 1,857.1 2,126.8
---------- ---------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ---------
Total assets.................................... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,097.3 $ 2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ---------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ---------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ---------
Total liabilities............................... 9,875.8 6,884.0
---------- ---------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ---------
Total shareholder's equity...................... 641.0 545.7
---------- ---------
Total liabilities and shareholder's equity...... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT 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
----------------------------------------------- ------- -------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
------- -------
Balance at end of period................... 2.5 2.5
------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
------- -------
Balance at end of period................... 386.9 346.3
------- -------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
------- -------
Balance at end of period................... 213.1 176.4
------- -------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
------- -------
Balance at end of period................... 38.5 20.5
------- -------
Total shareholder's equity............. $ 641.0 $ 545.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8)
Payment related to cession of
disability income business........ (207.0) --
Change in deferred acquisition
costs............................. (181.3) (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2)
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4) (39.9)
Change in reinsurance receivable.... 22.1 (1.5)
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5) (0.2)
-------- --------
Net used in operating
activities.................... (343.3) (35.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7) (795.8)
Purchase of equity securities........... (3.2) (13.2)
Purchase of other investments........... (79.4) (36.2)
Other investing activities, net......... -- (2.0)
-------- --------
Net cash provided by investing
activities........................ 336.4 15.1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
-------- --------
Net cash provided by financing
activities........................ 19.2 22.0
-------- --------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
-------- --------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
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. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. 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.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
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
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
C. 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, and investment and loan
commitments. 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.
D. 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.
E. 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.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized 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 product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. 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.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. 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. 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. Individual health benefit liabilities for
active lives are estimated using the net level premium method, and assumptions
as to future morbidity, withdrawals and interest which provide a margin for
adverse deviation. Benefit liabilities for disabled lives are estimated using
the present value of benefits method and experience assumptions as to claim
terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual 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 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.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual 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 and group variable 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 benefits 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.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and 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. Allmerica P&C 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, Allmerica P&C 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.
J. 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.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT TRANSACTIONS
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.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
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.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of 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....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these 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 $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
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..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</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............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ----- ------
9.4 8.6 18.0
---------- ----- ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ----- ------
(7.7) 4.4 (3.3)
---------- ----- ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 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 $15.7 million were written down to the estimated fair value
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
less cost to sell of $12.0 million, and a net realized investment loss of $3.7
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, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. 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........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 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.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- --- --- -----
Total................................................... $ 11.2 $ 4.8 $ 6.6 $ 9.4
----- --- --- -----
----- --- --- -----
1996
Mortgage loans.............................................. $ 12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- --- --- -----
Total................................................... $ 14.6 $ 4.5 $ 7.9 $ 11.2
----- --- --- -----
----- --- --- -----
</TABLE>
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 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 $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- ------
Net investment income....................................... $164.2 $171.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities 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
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- ------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- ------
---------- ------
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
F-15
<PAGE>
NOTES TO 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................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- --------- --------- ---------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- --------- --------- ---------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
7. 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 statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $ 21.0 $ 17.1
----- -----
----- -----
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
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 life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. 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.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
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
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
aforementioned threshold, from a source other than statutory earned surplus
would also require the prior approval of the Delaware Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- ------
Net premiums................................................ $ 22.8 $ 32.7
---------- ------
---------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- ------
---------- ------
</TABLE>
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- ------
Balance at end of year...................................... $765.3 $632.7
---------- ------
---------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. 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
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. 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 Allmerica Financial
Corp. 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
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 the 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.
The Company has been named a defendant in various 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 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.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. 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.
14. STATUTORY FINANCIAL INFORMATION
The Company is 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,
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
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- ------
---------- ------
</TABLE>
15. EVENT 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 refiled the 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, AFC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation, of which $21.0 million was apportioned to AFLIAC. 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.
F-20
<PAGE>
BALANCE SHEET
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $2,266,663 $15,374,014 $ 471,447 $24,213,382 $ 27,641 $ 622,421
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 91 133 -- -- --
---------- ------------ ------------ ------------ ---------- ----------
Total assets.............................. 2,266,663 15,374,105 471,580 24,213,382 27,641 622,421
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 12 -- -- 131 3 --
---------- ------------ ------------ ------------ ---------- ----------
Net assets................................ $2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
---------- ------------ ------------ ------------ ---------- ----------
---------- ------------ ------------ ------------ ---------- ----------
Net asset distribution by category:
Variable life policies.................... $2,266,651 $15,373,834 $ 471,580 $24,213,251 $ 27,638 $ 622,421
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- 271 -- -- -- --
---------- ------------ ------------ ------------ ---------- ----------
$2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
---------- ------------ ------------ ------------ ---------- ----------
Units outstanding........................... 1,283,086 11,359,499 394,674 11,682,115 21,431 395,456
Net asset value per unit.................... $ 1.766562 $ 1.353414 $1.194860 $ 2.072677 $1.289650 $1.573932
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $8,819,867 $ 191,017 $ 483,804 $7,786,135
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 12
------------- ---------- ------------ -------------
Total assets.............................. 8,819,867 191,017 483,804 7,786,147
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 68 1 3 --
------------- ---------- ------------ -------------
Net assets................................ $8,819,799 $ 191,016 $ 483,801 $7,786,147
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
Net asset distribution by category:
Variable life policies.................... $8,819,799 $ 191,016 $ 483,801 $7,786,147
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
------------- ---------- ------------ -------------
$8,819,799 $ 191,016 $ 483,801 $7,786,147
------------- ---------- ------------ -------------
Units outstanding........................... 4,220,377 109,264 294,851 5,536,528
Net asset value per unit.................... $ 2.089813 $1.748206 $1.640835 $ 1.406323
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
BALANCE SHEET
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ 190,605 $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- 56,940 127,409 586,624 48,782 579,716
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 5 -- --
------------ ----------- ------------- ---------- ---------- -------------
Total assets.............................. 190,605 56,940 127,409 586,629 48,782 579,716
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
------------ ----------- ------------- ---------- ---------- -------------
Net assets................................ $ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
------------ ----------- ------------- ---------- ---------- -------------
------------ ----------- ------------- ---------- ---------- -------------
Net asset distribution by category:
Variable life policies.................... $ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- -- -- --
------------ ----------- ------------- ---------- ---------- -------------
$ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
------------ ----------- ------------- ---------- ---------- -------------
------------ ----------- ------------- ---------- ---------- -------------
Units outstanding........................... 123,614 41,971 75,014 296,384 37,623 365,683
Net asset value per unit.................... $1.541942 $1.356639 $1.698480 $ 1.979291 $ 1.296617 $1.585297
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL STOCK INTERNATIONAL EQUITY INDUSTRIAL INCOME TOTAL RETURN
---------------------- -------------------- ----------------- ------------
<S> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. 313,080 -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- 4,124,898 -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- 8,260 56,271
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 7 -- --
---------- ----------- ----------------- ------------
Total assets.............................. 313,080 4,124,905 8,260 56,271
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 1 -- -- --
---------- ----------- ----------------- ------------
Net assets................................ $ 313,079 $4,124,905 $ 8,260 $ 56,271
---------- ----------- ----------------- ------------
---------- ----------- ----------------- ------------
Net asset distribution by category:
Variable life policies.................... $ 313,079 $4,124,905 $ 8,260 $ 56,271
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
---------- ----------- ----------------- ------------
$ 313,079 $4,124,905 $ 8,260 $ 56,271
---------- ----------- ----------------- ------------
---------- ----------- ----------------- ------------
Units outstanding........................... 277,770 3,667,589 5,811 42,974
Net asset value per unit.................... $1.127115 $ 1.124691 $1.421423 $1.309412
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. --
Investment in shares of T. Rowe Price
International Series, Inc................. --
Investment in shares of Delaware Group
Premium Fund, Inc......................... --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... 10,044,137
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 58
--------------
Total assets.............................. 10,044,195
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... --
--------------
Net assets................................ $10,044,195
--------------
--------------
Net asset distribution by category:
Variable life policies.................... $10,044,195
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... --
--------------
$10,044,195
--------------
--------------
Units outstanding........................... 9,366,395
Net asset value per unit.................... $ 1.072365
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
OPS
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
---------- ------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 17,907 $659,374 $216,882 $224,452 $ 604 $ --
EXPENSES:
Mortality and expense risk fees........... 9,160 67,682 20,985 85,929 70 2,921
---------- ------------ ------------ ------------ ---------- -----------
Net investment income..................... 8,747 591,692 195,897 138,523 534 (2,921)
---------- ------------ ------------ ------------ ---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 21,129 -- -- 40,412 -- --
Net realized gain from sales of
investments............................. (3,863) 13,484 -- 270,900 857 9,933
---------- ------------ ------------ ------------ ---------- -----------
Net realized gain....................... 17,266 13,484 -- 311,312 857 9,933
Net unrealized gain (loss)................ (145,250) 360,476 -- 183,657 507 (119,618)
---------- ------------ ------------ ------------ ---------- -----------
Net realized and unrealized gain
(loss)................................ (127,984) 373,960 -- 494,969 1,364 (109,685)
---------- ------------ ------------ ------------ ---------- -----------
Net increase in net assets from
operations............................ $(119,237) $965,652 $195,897 $633,492 $1,898 $(112,606)
---------- ------------ ------------ ------------ ---------- -----------
---------- ------------ ------------ ------------ ---------- -----------
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,781 $ 1,945 $ 56 $ 65,149
EXPENSES:
Mortality and expense risk fees........... 43,360 1,234 1,864 40,567
------------- ------------ ------------ -------------
Net investment income..................... (41,579) 711 (1,808) 24,582
------------- ------------ ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 93,491 922 1,651 --
Net realized gain from sales of
investments............................. 463,603 3,152 (1,221) 60,619
------------- ------------ ------------ -------------
Net realized gain....................... 557,094 4,074 430 60,619
Net unrealized gain (loss)................ 276,190 (12,295) (47,658) (350,436)
------------- ------------ ------------ -------------
Net realized and unrealized gain
(loss)................................ 833,284 (8,221) (47,228) (289,817)
------------- ------------ ------------ -------------
Net increase in net assets from
operations............................ $791,705 $ (7,510) $(49,036) $(265,235)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
OPS
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 3,501 $ 898 $ 1,819 $ 1,056 $ 11,971
EXPENSES:
Mortality and expense risk fees........... 628 260 348 1,583 256 1,997
------------ ----------- ------------- -------- ---------- -------------
Net investment income..................... (628) 3,241 550 236 800 9,974
------------ ----------- ------------- -------- ---------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 2,225 3,196 47,583 3,112 35,913
Net realized gain from sales of
investments............................. (916) (516) 1,934 37,699 224 4,871
------------ ----------- ------------- -------- ---------- -------------
Net realized gain....................... (916) 1,709 5,130 85,282 3,336 40,784
Net unrealized gain (loss)................ (29,462) (11,354) (15,629) (55,045) (8,127) (57,674)
------------ ----------- ------------- -------- ---------- -------------
Net realized and unrealized gain
(loss)................................ (30,378) (9,645) (10,499) 30,237 (4,791) (16,890)
------------ ----------- ------------- -------- ---------- -------------
Net increase in net assets from
operations............................ $(31,006) $(6,404) $ (9,949) $30,473 $(3,991) $ (6,916)
------------ ----------- ------------- -------- ---------- -------------
------------ ----------- ------------- -------- ---------- -------------
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL INTERNATIONAL INDUSTRIAL TOTAL
STOCK EQUITY INCOME RETURN
------------------- ---------------------------- ----------------- ------------
<S> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 11,680 $ -- $ --
EXPENSES:
Mortality and expense risk fees........... 896 11,394 30 200
-------- ---------- --- -----
Net investment income..................... (896) 286 (30) (200)
-------- ---------- --- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- --
Net realized gain from sales of
investments............................. 323 9,242 324 525
-------- ---------- --- -----
Net realized gain....................... 323 9,242 324 525
Net unrealized gain (loss)................ (27,510) (333,972) (247) (739)
-------- ---------- --- -----
Net realized and unrealized gain
(loss)................................ (27,187) (324,730) 77 (214)
-------- ---------- --- -----
Net increase in net assets from
operations............................ $(28,083) $(324,444) $ 47 $(414)
-------- ---------- --- -----
-------- ---------- --- -----
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------------
FOR THE PERIOD
2/17/98** TO 9/30/98
--------------------
INVESTMENT INCOME:
Dividends................................. $ 5,468
EXPENSES:
Mortality and expense risk fees........... 22,795
--------
Net investment income..................... (17,327)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 29,711
Net realized gain from sales of
investments............................. 3,421
--------
Net realized gain....................... 33,132
Net unrealized gain (loss)................ 452,436
--------
Net realized and unrealized gain
(loss)................................ 485,568
--------
Net increase in net assets from
operations............................ $468,241
--------
--------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
CNA
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
----------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ 8,747 $ 591,692 $ 195,897 $ 138,523 $ 534 $ (2,921)
Net realized gain on investments........ 17,266 13,484 -- 311,312 857 9,933
Net unrealized gain (loss) on
investments........................... (145,250) 360,476 -- 183,657 507 (119,618)
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets from
operations............................ (119,237) 965,652 195,897 633,492 1,898 (112,606)
----------- ------------ ------------ ------------ ---------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 676,055 2,980,199 1,605,139 2,382,378 18,129 421,346
Terminations............................ (47,687) (53,707) (47,898) (11,947) (81) (55,014)
Insurance and other charges............. (6,039) (345,058) (684,136) (710,090) (156) (13,531)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (11,755) 1,982,655 (29,097,886) 13,375,518 (31,762) 143,171
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- (251) -- -- -- --
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets from capital
transactions.............................. 610,574 4,563,838 (28,224,781) 15,035,859 (13,870) 495,972
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets.............. 491,337 5,529,490 (28,028,884) 15,669,351 (11,972) 383,366
NET ASSETS:
Beginning of period..................... 1,775,314 9,844,615 28,500,464 8,543,900 39,610 239,055
----------- ------------ ------------ ------------ ---------- ----------
End of period........................... $ 2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
----------- ------------ ------------ ------------ ---------- ----------
----------- ------------ ------------ ------------ ---------- ----------
<CAPTION>
SELECT SELECT SELECT
GROWTH VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (41,579) $ 711 $ (1,808) $ 24,582
Net realized gain on investments........ 557,094 4,074 430 60,619
Net unrealized gain (loss) on
investments........................... 276,190 (12,295) (47,658) (350,436)
------------- ---------- ------------ -------------
Net increase in net assets from
operations............................ 791,705 (7,510) (49,036) (265,235)
------------- ---------- ------------ -------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 2,083,798 149,639 232,167 1,902,015
Terminations............................ (38,487) (44,998) (31,514) (52,253)
Insurance and other charges............. (214,285) (6,310) (9,024) (199,317)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (785,039) (71,967) 106,174 764,111
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- --
------------- ---------- ------------ -------------
Net increase in net assets from capital
transactions.............................. 1,045,987 26,364 297,803 2,414,556
------------- ---------- ------------ -------------
Net increase in net assets.............. 1,837,692 18,854 248,767 2,149,321
NET ASSETS:
Beginning of period..................... 6,982,107 172,162 235,034 5,636,826
------------- ---------- ------------ -------------
End of period........................... $8,819,799 $191,016 $483,801 $7,786,147
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (628) $ 3,241 $ 550 $ 236 $ 800 $ 9,974
Net realized gain on investments........ (916) 1,709 5,130 85,282 3,336 40,784
Net unrealized gain (loss) on
investments........................... (29,462) (11,354) (15,629) (55,045) (8,127 ) (57,674)
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets from
operations............................ (31,006) (6,404) (9,949) 30,473 (3,991 ) (6,916)
------------ ----------- ------------- -------- -------- -------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 94,179 31,039 103,604 248,613 28,087 220,392
Terminations............................ (3,230) (4,865) (23,794) (18,463) (2,212 ) (178)
Insurance and other charges............. (3,932) (2,402) (4,092) (5,885) (2,489 ) (439)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 69,209 (3,857) 2,659 (13,668) (21,384 ) (4,582)
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- -- -- --
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets from capital
transactions.......................... 156,226 19,915 78,377 210,597 2,002 215,193
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets.............. 125,220 13,511 68,428 241,070 (1,989 ) 208,277
NET ASSETS:
Beginning of period..................... 65,385 43,429 58,981 345,559 50,771 371,439
------------ ----------- ------------- -------- -------- -------------
End of period........................... $190,605 $ 56,940 $127,409 $586,629 $48,782 $579,716
------------ ----------- ------------- -------- -------- -------------
------------ ----------- ------------- -------- -------- -------------
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL INTERNATIONAL INDUSTRIAL TOTAL
STOCK EQUITY INCOME RETURN
------------------- -------------------- ----------------- ------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (896) $ 286 $ (30) $ (200)
Net realized gain on investments........ 323 9,242 324 525
Net unrealized gain (loss) on
investments........................... (27,510) (333,972) (247) (739)
-------- ----------- ------- ------------
Net increase in net assets from
operations............................ (28,083) (324,444) 47 (414)
-------- ----------- ------- ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 99,713 5,973 5,817 7,062
Terminations............................ (1,553) (370) (916) (8)
Insurance and other charges............. (3,575) (146,229) (3,909) (636)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 148,748 4,507,342 10 42
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- --
-------- ----------- ------- ------------
Net increase in net assets from capital
transactions.......................... 243,333 4,366,716 1,002 6,460
-------- ----------- ------- ------------
Net increase in net assets.............. 215,250 4,042,272 1,049 6,046
NET ASSETS:
Beginning of period..................... 97,829 82,633 7,211 50,225
-------- ----------- ------- ------------
End of period........................... $313,079 $4,124,905 $ 8,260 $56,271
-------- ----------- ------- ------------
-------- ----------- ------- ------------
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------------
PERIOD FROM
2/17/98** TO 9/30/98
--------------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (17,327)
Net realized gain on investments........ 33,132
Net unrealized gain (loss) on
investments........................... 452,436
--------------------
Net increase in net assets from
operations............................ 468,241
--------------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ --
Terminations............................ --
Insurance and other charges............. (305,243)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 9,881,197
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... --
--------------------
Net increase in net assets from capital
transactions.......................... 9,575,954
--------------------
Net increase in net assets.............. 10,044,195
NET ASSETS:
Beginning of period..................... --
--------------------
End of period........................... $10,044,195
--------------------
--------------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company) established on May 1,
1995 for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Group VEL are
clearly identified and distinguished from the other assets and liabilities of
the Company. Group VEL cannot be charged with liabilities arising out of any
other business of the Company.
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty-one
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc., or of The Morgan Stanley
Universal Funds, Inc. (Morgan Stanley) managed by Miller Anderson & Sherrerd,
LLP. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO and
Morgan Stanley (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act. INVESCO is available only to employees
of INVESCO and its affiliates. Morgan Stanley is available only to employees of
Duke Energy Corporation and its affiliates.
Effective January 9, 1998, the investment portfolio of the Trust, which was
formerly known as Small-Mid Cap Value Fund changed its name to Select Value
Opportunity Fund.
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, Fidelity VIP II, T.
Rowe Price, DGPF, INVESCO, or Morgan Stanley. 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, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, or Morgan
Stanley at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return with First Allmerica. The Company anticipates no tax
liability resulting from the operations of Group VEL. Therefore, no provision
for income taxes has been charged against Group VEL.
SA-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the Group VEL Account of Allmerica Financial Life
Insurance and Annuity 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
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth and Income, Select Value Opportunity,
Select International Equity, Select Capital Appreciation, Fidelity VIP High
Income, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas,
Fidelity VIP II Asset Manager, T. Rowe Price International Stock, DGPF
International Equity, INVESCO Industrial Income, INVESCO Total Return, and
Morgan Stanley Fixed Income) constituting the Group VEL Account of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997, the results
of each of their operations and the changes in each of their net assets for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity 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>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT EQUITY
GROWTH GRADE INCOME MONEY MARKET INDEX GOVERNMENT BOND
----------- ------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $1,775,306 $9,844,560 $28,500,493 $8,543,950 $ 39,610
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... 8 55 -- -- --
----------- ------------ -------------- ----------- ---------------
Total assets.............................. 1,775,314 9,844,615 28,500,493 8,543,950 39,610
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- 29 50 --
----------- ------------ -------------- ----------- ---------------
Net assets................................ $1,775,314 $9,844,615 $28,500,464 $8,543,900 $ 39,610
----------- ------------ -------------- ----------- ---------------
----------- ------------ -------------- ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $1,775,314 $9,844,364 $28,500,464 $8,543,900 $ 39,610
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- 251 -- -- --
----------- ------------ -------------- ----------- ---------------
$1,775,314 $9,844,615 $28,500,464 $8,543,900 $ 39,610
----------- ------------ -------------- ----------- ---------------
----------- ------------ -------------- ----------- ---------------
Units outstanding, December 31, 1997...... 987,111 7,835,199 24,839,712 4,357,081 33,062
Net asset value per unit, December 31,
1997.................................... $ 1.798494 $1.256428 $ 1.147375 $1.960923 $1.197968
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
----------------- -------------
<S> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 239,055 $6,982,157
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- --
----------------- -------------
Total assets.............................. 239,055 6,982,157
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- 50
----------------- -------------
Net assets................................ $ 239,055 $6,982,107
----------------- -------------
----------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 239,055 $6,982,107
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- --
----------------- -------------
$ 239,055 $6,982,107
----------------- -------------
----------------- -------------
Units outstanding, December 31, 1997...... 136,320 3,619,339
Net asset value per unit, December 31,
1997.................................... $1.753627 $1.929111
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT SELECT
GROWTH AND SELECT VALUE INTERNATIONAL CAPITAL FIDELITY VIP
INCOME OPPORTUNITY* EQUITY APPRECIATION HIGH INCOME
----------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- 43,429
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Total assets.............................. 172,162 235,034 5,636,826 65,385 43,429
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Net assets................................ $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
$ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Units outstanding, December 31, 1997...... 96,017 132,435 3,907,238 37,757 29,272
Net asset value per unit, December 31,
1997.................................... $1.793040 $1.774701 $1.442663 $1.731741 $1.483642
<CAPTION>
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH
----------------- -------------
<S> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 58,981 345,559
Investment in shares of T. Rowe Price
International Series, Inc................. -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- --
----------------- -------------
Total assets.............................. 58,981 345,559
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- --
----------------- -------------
Net assets................................ $ 58,981 $ 345,559
----------------- -------------
----------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 58,981 $ 345,559
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- --
----------------- -------------
$ 58,981 $ 345,559
----------------- -------------
----------------- -------------
Units outstanding, December 31, 1997...... 33,578 195,934
Net asset value per unit, December 31,
1997.................................... $1.756503 $1.763675
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE DGPF
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK INTERNATIONAL EQUITY
------------ --------------- ------------------- --------------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 50,771 371,439 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- 97,829 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- 82,633
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- -- --
------------ --------------- ---------- ----------
Total assets.............................. 50,771 371,439 97,829 82,633
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- -- --
------------ --------------- ---------- ----------
Net assets................................ $ 50,771 $ 371,439 $ 97,829 $ 82,633
------------ --------------- ---------- ----------
------------ --------------- ---------- ----------
Net asset distribution by category:
Variable life policies.................... $ 50,771 $ 371,439 $ 97,829 $ 82,633
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- -- --
------------ --------------- ---------- ----------
$ 50,771 $ 371,439 $ 97,829 $ 82,633
------------ --------------- ---------- ----------
------------ --------------- ---------- ----------
Units outstanding, December 31, 1997...... 37,389 238,988 85,092 70,825
Net asset value per unit, December 31,
1997.................................... $1.357915 $1.554217 $1.149677 $1.166687
<CAPTION>
INVESCO INVESCO MORGAN STANLEY
INDUSTRIAL INCOME TOTAL RETURN FIXED INCOME(a)
----------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... 7,211 50,225 --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- --
----------------- ----------------- ---------------
Total assets.............................. 7,211 50,225 --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- --
----------------- ----------------- ---------------
Net assets................................ $ 7,211 $ 50,225 $ --
----------------- ----------------- ---------------
----------------- ----------------- ---------------
Net asset distribution by category:
Variable life policies.................... $ 7,211 $ 50,225 $ --
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- --
----------------- ----------------- ---------------
$ 7,211 $ 50,225 $ --
----------------- ----------------- ---------------
----------------- ----------------- ---------------
Units outstanding, December 31, 1997...... 5,168 38,284 --
Net asset value per unit, December 31,
1997.................................... $1.395217 $1.311904 $1.000000
</TABLE>
(a) For the period ended 12/31/97, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
-------------------- TO --------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
--------- --------- --------- --------- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 19,495 $ 2,650 $ 4 $ 611,287 $14 $11
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 6,270 1,681 -- 61,160 -- --
--------- --------- --- --------- ---- ---
Net investment income
(loss).................. 13,225 969 4 550,127 14 11
--------- --------- --- --------- ---- ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 282,628 51,596 18 -- -- --
Net realized gain (loss)
from sales of
investments............. 22,096 35 -- 7,069 -- --
--------- --------- --- --------- ---- ---
Net realized gain
(loss)................ 304,724 51,631 18 7,069 -- --
Net unrealized gain
(loss).................. (57,127) (33,389) 17 282,868 (6) 11
--------- --------- --- --------- ---- ---
Net realized and
unrealized gain
(loss)................ 247,597 18,242 35 289,937 (6) 11
--------- --------- --- --------- ---- ---
Net increase (decrease)
in net assets from
operations............ $ 260,822 $ 19,211 $39 $ 840,064 $ 8 $22
--------- --------- --- --------- ---- ---
--------- --------- --- --------- ---- ---
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------ 5/1/95** ------------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
--------- ------- -------------- ----------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 168,681 $ 2,028 $ 7 $ 99,982 $ 29 $ 1
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 24,667 683 -- 49,283 7 --
--------- ------- ----- ----------- ------ ---
Net investment income
(loss).................. 144,014 1,345 7 50,699 22 1
--------- ------- ----- ----------- ------ ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 231,984 94 16
Net realized gain (loss)
from sales of
investments............. -- -- -- 57,606 128 --
--------- ------- ----- ----------- ------ ---
Net realized gain
(loss)................ -- -- -- 289,590 222 16
Net unrealized gain
(loss).................. -- -- -- 1,759,333 (123) 25
--------- ------- ----- ----------- ------ ---
Net realized and
unrealized gain
(loss)................ -- -- -- 2,048,923 99 41
--------- ------- ----- ----------- ------ ---
Net increase (decrease)
in net assets from
operations............ $ 144,014 $ 1,345 $ 7 $ 2,099,622 $ 121 $42
--------- ------- ----- ----------- ------ ---
--------- ------- ----- ----------- ------ ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
FOR THE SELECT AGGRESSIVE GROWTH
YEAR ENDED FOR THE FOR THE
DECEMBER PERIOD YEAR ENDED FOR THE
31, 5/1/95** DECEMBER 31, PERIOD
----------- TO ---------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----- ---- --------- -------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $837 $57 $ 9 $ -- $ -- $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 19 8 -- 706 10 --
----- ---- --- -------- ------ -----
Net investment income
(loss).................. 818 49 9 (706) (10) --
----- ---- --- -------- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 17,916 464 --
Net realized gain (loss)
from sales of
investments............. 1 5 -- 748 182 --
----- ---- --- -------- ------ -----
Net realized gain
(loss)................ 1 5 -- 18,664 646 --
Net unrealized gain
(loss).................. (88) (2) 7 3,863 (425) 49
----- ---- --- -------- ------ -----
Net realized and
unrealized gain
(loss)................ (87) 3 7 22,527 221 49
----- ---- --- -------- ------ -----
Net increase (decrease)
in net assets from
operations............ $731 $52 $16 $ 21,821 $ 211 $ 49
----- ---- --- -------- ------ -----
----- ---- --- -------- ------ -----
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------- 5/1/95** ---------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
----------- ------ -------------- -------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 20,160 $ 5 $ -- $ 1,134 $ 10 $ 2
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 39,740 2 -- 365 2 --
----------- ------ ----- -------- ------ ---
Net investment income
(loss).................. (19,580) 3 -- 769 8 2
----------- ------ ----- -------- ------ ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 363,902 233 -- 13,936 143 9
Net realized gain (loss)
from sales of
investments............. 51,101 92 -- 296 63 --
----------- ------ ----- -------- ------ ---
Net realized gain
(loss)................ 415,003 325 -- 14,232 206 9
Net unrealized gain
(loss).................. 1,431,596 (229) 37 (5,403) (126) 30
----------- ------ ----- -------- ------ ---
Net realized and
unrealized gain
(loss)................ 1,846,599 96 37 8,829 80 39
----------- ------ ----- -------- ------ ---
Net increase (decrease)
in net assets from
operations............ $ 1,827,019 $ 99 $ 37 $ 9,598 $ 88 $41
----------- ------ ----- -------- ------ ---
----------- ------ ----- -------- ------ ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
--------------- TO ------------------ 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
-------- ----- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 1,289 $ 40 $ 1 $ 131,715 $ 1,124 $ 2
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 633 19 -- 35,909 119 --
-------- ----- --- --------- ------- ---
Net investment income
(loss).................. 656 21 1 95,806 1,005 2
-------- ----- --- --------- ------- ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 30,900 252 6 182,156 136 1
Net realized gain (loss)
from sales of
investments............. 700 142 -- 11,256 70 --
-------- ----- --- --------- ------- ---
Net realized gain
(loss)................ 31,600 394 6 193,412 206 1
Net unrealized gain
(loss).................. (5,610) 195 14 (15,069) 3,759 23
-------- ----- --- --------- ------- ---
Net realized and
unrealized gain
(loss)................ 25,990 589 20 178,343 3,965 24
-------- ----- --- --------- ------- ---
Net increase (decrease)
in net assets from
operations............ $ 26,646 $ 610 $21 $ 274,149 $ 4,970 $26
-------- ----- --- --------- ------- ---
-------- ----- --- --------- ------- ---
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
--------------- 5/1/95** --------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------ -------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ -- $ -- $ 5 $ 351 $ 19 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 204 58 -- 119 5 --
------- ------ --- ------- ------ -----
Net investment income
(loss).................. (204) (58) 5 232 14 --
------- ------ --- ------- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- 28 -- 43 4 --
Net realized gain (loss)
from sales of
investments............. 544 53 -- 94 42 --
------- ------ --- ------- ------ -----
Net realized gain
(loss)................ 544 81 -- 137 46 --
Net unrealized gain
(loss).................. 6,529 (147) 74 2,892 66 21
------- ------ --- ------- ------ -----
Net realized and
unrealized gain
(loss)................ 7,073 (66) 74 3,029 112 21
------- ------ --- ------- ------ -----
Net increase (decrease)
in net assets from
operations............ $ 6,869 $ (124) $ 79 $ 3,261 $ 126 $ 21
------- ------ --- ------- ------ -----
------- ------ --- ------- ------ -----
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP
EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
-------------- TO ----------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
------- ----- --------- -------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 91 $ 1 $ 4 $ 2,224 $ 1 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 177 7 -- 1,311 832 --
------- ----- --- -------- ------- -----
Net investment income
(loss).................. (86) (6) 4 913 (831) --
------- ----- --- -------- ------- -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 457 16 -- 9,956 21 --
Net realized gain (loss)
from sales of
investments............. 242 68 -- 16,498 151 --
------- ----- --- -------- ------- -----
Net realized gain
(loss)................ 699 84 -- 26,454 172 --
Net unrealized gain
(loss).................. 5,483 87 36 43,944 2,233 48
------- ----- --- -------- ------- -----
Net realized and
unrealized gain
(loss)................ 6,182 171 36 70,398 2,405 48
------- ----- --- -------- ------- -----
Net increase (decrease)
in net assets from
operations............ $ 6,096 $165 $40 $ 71,311 $ 1,574 $ 48
------- ----- --- -------- ------- -----
------- ----- --- -------- ------- -----
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
---------------- 5/1/95** ----------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- -------------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 344 $ 3 $ -- $ 6,739 $ 10 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 205 76 -- 994 501 --
------- ------- ----- -------- ------- -----
Net investment income
(loss).................. 139 (73) -- 5,745 (491) --
------- ------- ----- -------- ------- -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,365 3 -- 16,905 8 --
Net realized gain (loss)
from sales of
investments............. 201 138 -- 499 130 --
------- ------- ----- -------- ------- -----
Net realized gain
(loss)................ 1,566 141 -- 17,404 138 --
Net unrealized gain
(loss).................. 285 1,222 15 28,899 7,451 25
------- ------- ----- -------- ------- -----
Net realized and
unrealized gain
(loss)................ 1,851 1,363 15 46,303 7,589 25
------- ------- ----- -------- ------- -----
Net increase (decrease)
in net assets from
operations............ $ 1,990 $ 1,290 $ 15 $ 52,048 $ 7,098 $ 25
------- ------- ----- -------- ------- -----
------- ------- ----- -------- ------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK FOR THE DGPF INTERNATIONAL EQUITY INVESCO INDUSTRIAL INCOME
FOR THE PERIOD FOR THE FOR THE FOR THE FOR THE
YEAR ENDED 2/9/96** YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, TO DECEMBER 31, 7/2/96** DECEMBER 31, 7/2/96**
1997 12/31/96 1997 TO 12/31/96 1997 TO 12/31/96
------------- ---------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 898 $ 468 $ 118 $ -- $ 112 $ 56
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 560 352 251 2 23 2
------ ---------- ----- ----- ------ -----
Net investment income
(loss).................. 338 116 (133) (2) 89 54
------ ---------- ----- ----- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,272 281 -- -- 398 154
Net realized gain (loss)
from sales of
investments............. 183 921 164 18 25 25
------ ---------- ----- ----- ------ -----
Net realized gain
(loss)................ 1,455 1,202 164 18 423 179
Net unrealized gain
(loss).................. (326) 3,447 (695) 68 752 (141)
------ ---------- ----- ----- ------ -----
Net realized and
unrealized gain
(loss)................ 1,129 4,649 (531) 86 1,175 38
------ ---------- ----- ----- ------ -----
Net increase (decrease)
in net assets from
operations............ $1,467 $4,765 $(664) $ 84 $1,264 $ 92
------ ---------- ----- ----- ------ -----
------ ---------- ----- ----- ------ -----
<CAPTION>
INVESCO TOTAL RETURN
FOR THE FOR THE
YEAR ENDED PERIOD
DECEMBER 31, 7/2/96**
1997 TO 12/31/96
------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................. $1,045 $458
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 137 22
------ -----
Net investment income
(loss).................. 908 436
------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 245 1
Net realized gain (loss)
from sales of
investments............. 31 247
------ -----
Net realized gain
(loss)................ 276 248
Net unrealized gain
(loss).................. 5,287 (38)
------ -----
Net realized and
unrealized gain
(loss)................ 5,563 210
------ -----
Net increase (decrease)
in net assets from
operations............ $6,471 $646
------ -----
------ -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH
PERIOD INVESTMENT GRADE INCOME
YEAR ENDED FROM YEAR ENDED
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
---------------------- TO ------------------ FROM 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----------- --------- ---------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 13,225 $ 969 $ 4 $ 550,127 $ 14 $ 11
Net realized gain
(loss)................ 304,724 51,631 18 7,069 -- --
Net unrealized gain
(loss)................ (57,127) (33,389) 17 282,868 (6) 11
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
operations............ 260,822 19,211 39 840,064 8 22
----------- --------- ----- ----------- ----- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 793,195 638,444 -- 9,313,499 -- --
Terminations............ (2,053) -- -- -- -- --
Insurance and other
charges............... (3,267) (2) -- (447,871) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 68,391 617 -- 138,693 -- --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (283) 200 -- -- 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 856,266 638,776 200 9,004,321 -- 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets......... 1,117,088 657,987 239 9,844,385 8 222
NET ASSETS:
Beginning of period....... 658,226 239 -- 230 222 --
----------- --------- ----- ----------- ----- -----
End of period............. $ 1,775,314 $ 658,226 $239 $ 9,844,615 $ 230 $222
----------- --------- ----- ----------- ----- -----
----------- --------- ----- ----------- ----- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------------ FROM 5/1/95** -------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------------ ---------- --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 144,014 $ 1,345 $ 7 $ 50,699 $ 22 $ 1
Net realized gain
(loss)................ -- -- -- 289,590 222 16
Net unrealized gain
(loss)................ -- -- -- 1,759,333 (123) 25
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
operations............ 144,014 1,345 7 2,099,622 121 42
------------ ---------- ----- ----------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 30,656,799 924,390 -- 6,793,979 6,564 --
Terminations............ (31) (13) -- (198) -- --
Insurance and other
charges............... (704,864) (110,367) -- (364,580) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... (1,673,553) (737,246) -- 8,392 14 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (217) 200 -- (256) 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 28,278,351 76,547 200 6,437,593 6,322 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets......... 28,422,365 77,892 207 8,537,215 6,443 242
NET ASSETS:
Beginning of period....... 78,099 207 -- 6,685 242 --
------------ ---------- ----- ----------- ------- -----
End of period............. $ 28,500,464 $ 78,099 $207 $ 8,543,900 $ 6,685 $242
------------ ---------- ----- ----------- ------- -----
------------ ---------- ----- ----------- ------- -----
</TABLE>
** Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
PERIOD SELECT AGGRESSIVE GROWTH
YEAR ENDED FROM YEAR ENDED
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
---------------------- TO ------------------ FROM 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----------- --------- ---------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 818 $ 49 $ 9 $ (706) $ (10) $ --
Net realized gain
(loss)................ 1 5 -- 18,664 646 --
Net unrealized gain
(loss)................ (88) (2) 7 3,863 (425) 49
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
operations............ 731 52 16 21,821 211 49
----------- --------- ----- ----------- ----- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 5,649 2,984 -- 98,882 8,376 --
Terminations............ (713) -- -- (3,662) -- --
Insurance and other
charges............... (163) (54) -- (3,465) (71) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 31,189 (58) -- 117,027 (17) --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (223) 200 -- (296) 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 35,962 2,649 200 208,782 7,992 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets......... 36,693 2,701 216 230,603 8,203 249
NET ASSETS:
Beginning of period....... 2,917 216 -- 8,452 249 --
----------- --------- ----- ----------- ----- -----
End of period............. $ 39,610 $ 2,917 $216 $ 239,055 $8,452 $249
----------- --------- ----- ----------- ----- -----
----------- --------- ----- ----------- ----- -----
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
------------------------ FROM 5/1/95** -------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------------ ---------- --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (19,580) $ 3 $ -- $ 769 $ 8 $ 2
Net realized gain
(loss)................ 415,003 325 -- 14,232 206 9
Net unrealized gain
(loss)................ 1,431,596 (229) 37 (5,403) (126) 30
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
operations............ 1,827,019 99 37 9,598 88 41
------------ ---------- ----- ----------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 5,368,817 1,756 -- 65,720 2,353 --
Terminations............ (18) -- -- (4,379) -- --
Insurance and other
charges............... (292,989) (4) -- (3,633) (4) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 77,472 4 (1) 102,491 (27) --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (285) 200 -- (286) 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 5,153,282 1,471 199 160,199 2,036 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets......... 6,980,301 1,570 236 169,797 2,124 241
NET ASSETS:
Beginning of period....... 1,806 236 -- 2,365 241 --
------------ ---------- ----- ----------- ------- -----
End of period............. $ 6,982,107 $ 1,806 $236 $ 172,162 $ 2,365 $241
------------ ---------- ----- ----------- ------- -----
------------ ---------- ----- ----------- ------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
---------------- FROM 5/1/95** ------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
-------- ------ --------------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 656 $ 21 $ 1 $ 95,806 $ 1,005 $ 2
Net realized gain
(loss)................ 31,600 394 6 193,412 206 1
Net unrealized gain
(loss)................ (5,610) 195 14 (15,069) 3,759 23
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets from
operations............ 26,646 610 21 274,149 4,970 26
-------- ------ ----- ---------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 151,059 5,481 -- 5,449,561 57,697 --
Terminations............ (3,904) -- -- (8) -- --
Insurance and other
charges............... (4,266) -- -- (259,243) (59) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 59,502 (40) -- 109,691 108 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (275) 200 -- (266) 200
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 202,391 5,166 200 5,300,001 57,480 200
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets......... 229,037 5,776 221 5,574,150 62,450 226
NET ASSETS:
Beginning of period....... 5,997 221 -- 62,676 226 --
-------- ------ ----- ---------- ------- -----
End of period............. $235,034 $5,997 $221 $5,636,826 $62,676 $226
-------- ------ ----- ---------- ------- -----
-------- ------ ----- ---------- ------- -----
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
---------------- FROM 5/1/95** --------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- --------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (204) $ (58) $ 5 $ 232 $ 14 $ --
Net realized gain
(loss)................ 544 81 -- 137 46 --
Net unrealized gain
(loss)................ 6,529 (147) 74 2,892 66 21
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets from
operations............ 6,869 (124) 79 3,261 126 21
------- ------- ----- ------- ------ -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 53,911 15,400 -- 37,542 3,933 --
Terminations............ (3,829) -- -- (1,972) -- --
Insurance and other
charges............... (1,570) (214) -- (1,317) (16) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... (4,994) (44) -- 1,864 37 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (299) 200 -- (250) 200
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets from
capital
transactions.......... 43,518 14,843 200 36,117 3,704 200
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets......... 50,387 14,719 279 39,378 3,830 221
NET ASSETS:
Beginning of period....... 14,998 279 -- 4,051 221 --
------- ------- ----- ------- ------ -----
End of period............. $65,385 $14,998 $279 $43,429 $4,051 $221
------- ------- ----- ------- ------ -----
------- ------- ----- ------- ------ -----
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
--------------- FROM 5/1/95** ------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------ --------------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (86) $ (6) $ 4 $ 913 $ (831) $ --
Net realized gain
(loss)................ 699 84 -- 26,454 172 --
Net unrealized gain
(loss)................ 5,483 87 36 43,944 2,233 48
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets from
operations............ 6,096 165 40 71,311 1,574 48
------- ------ ----- --------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 49,237 4,266 -- 137,061 326,955 --
Terminations............ (817) -- -- (17,376) (2) --
Insurance and other
charges............... (1,985) -- -- (4,065) (261) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 2,004 46 -- (169,701) 99 1
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (271) 200 -- (285) 200
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 48,439 4,041 200 (54,081) 326,506 201
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets......... 54,535 4,206 240 17,230 328,080 249
NET ASSETS:
Beginning of period....... 4,446 240 -- 328,329 249 --
------- ------ ----- --------- -------- -----
End of period............. $58,981 $4,446 $240 $ 345,559 $328,329 $249
------- ------ ----- --------- -------- -----
------- ------ ----- --------- -------- -----
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
---------------- FROM 5/1/95** ------------------ FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- --------------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 139 $ (73) $ -- $ 5,745 $ (491) $ --
Net realized gain
(loss)................ 1,566 141 -- 17,404 138 --
Net unrealized gain
(loss)................ 285 1,222 15 28,899 7,451 25
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets from
operations............ 1,990 1,290 15 52,048 7,098 25
------- ------- ----- -------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 31,760 17,543 -- 142,926 184,389 --
Terminations............ (184) (1) -- (172) (1) --
Insurance and other
charges............... (1,796) (460) -- (455) (13) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 687 (36) -- (14,595) 246 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (237) 200 -- (257) 200
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 30,467 16,809 200 127,704 184,364 200
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets......... 32,457 18,099 215 179,752 191,462 225
NET ASSETS:
Beginning of period....... 18,314 215 -- 191,687 225 --
------- ------- ----- -------- -------- -----
End of period............. $50,771 $18,314 $215 $371,439 $191,687 $225
------- ------- ----- -------- -------- -----
------- ------- ----- -------- -------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE INTERNATIONAL INVESCO
STOCK DGPF INTERNATIONAL EQUITY INVESCO INDUSTRIAL INCOME TOTAL RETURN
YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED
DECEMBER 31, FROM 2/9/96** DECEMBER 31, FROM 7/2/96** DECEMBER 31, FROM 7/2/96** DECEMBER 31,
1997 TO 12/31/96 1997 TO 12/31/96 1997 TO 12/31/96 1997
------------ ------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 338 $ 116 $ (133) $ (2) $ 89 $ 54 $ 908
Net realized gain
(loss)................ 1,455 1,202 164 18 423 179 276
Net unrealized gain
(loss)................ (326) 3,447 (695) 68 752 (141) 5,287
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets from
operations............ 1,467 4,765 (664) 84 1,264 92 6,471
------------ ------------- ------------- ------ ------ ------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 36,785 55,319 82,362 2,639 2,869 3,228 26,884
Terminations............ -- -- (1,381) -- -- -- --
Insurance and other
charges............... (1,021) -- (1,510) -- (242) (9) (764)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 532 (18) 1,096 7 3 6 32
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- -- -- -- -- -- --
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... 36,296 55,301 80,567 2,646 2,630 3,225 26,152
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets......... 37,763 60,066 79,903 2,730 3,894 3,317 32,623
NET ASSETS:
Beginning of period....... 60,066 -- 2,730 -- 3,317 -- 17,602
------------ ------------- ------------- ------ ------ ------ ------------
End of period............. $97,829 $60,066 $82,633 $2,730 $7,211 $3,317 $50,225
------------ ------------- ------------- ------ ------ ------ ------------
------------ ------------- ------------- ------ ------ ------ ------------
<CAPTION>
PERIOD
FROM 7/2/96**
TO 12/31/96
-------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 436
Net realized gain
(loss)................ 248
Net unrealized gain
(loss)................ (38)
-------------
Net increase (decrease)
in net assets from
operations............ 646
-------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 17,025
Terminations............ --
Insurance and other
charges............... (117)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 48
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... --
-------------
Net increase (decrease)
in net assets from
capital
transactions.......... 16,956
-------------
Net increase (decrease)
in net assets......... 17,602
NET ASSETS:
Beginning of period....... --
-------------
End of period............. $17,602
-------------
-------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company) established on May 1,
1995 for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Group VEL are
clearly identified and distinguished from the other assets and liabilities of
the Company. Group VEL cannot be charged with liabilities arising out of any
other business of the Company.
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty-one
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc., or of The Morgan Stanley
Universal Funds, Inc. (Morgan Stanley) managed by Miller Anderson & Sherrerd,
LLP. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO and
Morgan Stanley (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act. INVESCO is available only to employees
of INVESCO and its affiliates. Morgan Stanley is available only to employees of
Duke Energy Corporation and its affiliates.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, the portfolio changed its name to Select Value Opportunity
Fund.
Certain prior year balances have been reclassified to conform with current year
presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the
Sub-Accounts are stated at the net asset value per share of the respective
investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price,
DGPF, INVESCO, or Morgan Stanley. 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, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, or Morgan Stanley at net
asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return with First Allmerica. The
SA-14
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company anticipates no tax liability resulting from the operations of Group VEL.
Therefore, no provision for income taxes has been charged against Group VEL.
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, Fidelity VIP II, T.
Rowe Price, DGPF, INVESCO and Morgan Stanley 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>
ALLMERICA INVESTMENT TRUST:
Growth............................................... 734,812 $ 1,865,806 $ 2.416
Investment Grade Income.............................. 8,853,022 9,561,687 1.112
Money Market......................................... 28,500,493 28,500,493 1.000
Equity Index......................................... 3,103,505 6,784,715 2.753
Government Bond...................................... 37,832 39,693 1.047
Select Aggressive Growth............................. 107,441 235,568 2.225
Select Growth........................................ 3,855,415 5,550,754 1.811
Select Growth and Income............................. 110,929 177,661 1.552
Select Value Opportunity*............................ 144,547 240,435 1.626
Select International Equity.......................... 4,203,450 5,648,114 1.341
Select Capital Appreciation.......................... 38,530 58,929 1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income.......................................... 3,198 40,450 13.580
Equity-Income........................................ 2,429 53,374 24.280
Growth............................................... 9,314 299,332 37.100
Overseas............................................. 2,644 49,249 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager........................................ 20,624 335,065 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.................................. 7,679 94,707 12.740
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity................................. 5,324 83,261 15.520
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
Industrial Income.................................... 423 6,601 17.040
Total Return......................................... 3,177 44,975 15.810
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Fixed Income......................................... -- -- --
</TABLE>
* Name changed. See Note 1.
SA-15
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of up to $10. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1997 and 1996, these monthly deductions from sub-account
policy values amounted to $2,099,066 and $335,040, respectively. For the period
ended December 31, 1995, there were no monthly deductions from sub-account
policy values. These amounts are included on the statements of changes in net
assets in Insurance and other charges.
The Company makes a charge of up to .90% per annum based on the average daily
net assets of each
Sub-Account at each valuation date for mortality and expense risks. This charge
may be increased or decreased by the Board of Directors of the Company once each
year, subject to compliance with applicable state and federal requirements, but
the total charge may not exceed .90% per annum. During the first 10 policy
years, the Company also charges each Sub-Account up to .25% per annum based on
the average daily net assets of each Sub-Account for administrative expenses.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of First Allmerica, is principal underwriter and general distributor of Group
VEL, and does not receive any compensation for sales of Group VEL policies.
Commissions are paid to registered representatives of Allmerica Investments or
of independent broker-dealers by the Company. As the current series of policies
have a surrender charge, no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1997, 1996 and 1995, there were no
surrender charges applicable to Group VEL.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
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 Group VEL satisfies the current requirements of
the regulations, and it intends that Group VEL will continue to meet such
requirements.
SA-16
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF, INVESCO and Morgan Stanley shares by Group VEL
during the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth.......................................................... $ 1,457,017 $ 304,906
Investment Grade Income......................................... 10,029,950 475,557
Money Market.................................................... 30,454,456 2,032,062
Equity Index.................................................... 7,084,692 364,366
Government Bond................................................. 37,760 980
Select Aggressive............................................... 234,349 8,357
Select Growth................................................... 5,809,325 311,671
Select Growth and Income........................................ 184,500 9,596
Select Value Opportunity*....................................... 244,287 10,342
Select International Equity..................................... 5,839,070 261,107
Select Capital Appreciation..................................... 56,171 12,857
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income..................................................... 40,488 4,096
Equity-Income................................................... 53,137 4,327
Growth.......................................................... 162,155 205,367
Overseas........................................................ 34,993 3,022
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager................................................... 167,958 17,604
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock............................................. 39,576 1,670
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity............................................ 84,554 4,120
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
Industrial Income............................................... 3,949 832
Total Return.................................................... 32,380 5,075
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Fixed Income.................................................... -- --
------------ ------------
$ 62,050,767 $ 4,037,914
------------ ------------
------------ ------------
</TABLE>
* Name changed. See Note 1.
SA-17
<PAGE>
PROSPECTUS C
GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
This Prospectus describes certificates ("Certificate" or "Certificates") issued
under group flexible premium variable life insurance policies ("Policy" or
"Policies") offered by Allmerica Financial Life Insurance and Annuity Company
("Company") to eligible applicants ("Certificate Owners") who are members of a
non-qualified benefit plan having a minimum of five or more members, depending
on the group, and are Age 80 years old and under.
The certificates permit you to allocate net premiums among up to 20 Sub-Accounts
("Sub-Accounts") of the Group Vel Account ("Separate Account"), a Separate
Account of the Company, and a fixed interest account ("General Account") of the
Company (together "Accounts"). Each Sub-Account invests its assets in a
corresponding investment portfolio of Delaware Group Premium Fund, Inc. ("DGPF")
or in the Money Market Fund of Allmerica Investment Trust ("Trust"). The
following portfolios of DGPF are available under the Certificates (certain Funds
may not be available in all states):
<TABLE>
<S> <C> <C>
Decatur Total Return Trend Series Delchester Series
Series
Devon Series International Equity Capital Reserves
Series Series
DelCap Series Emerging Markets Series Strategic Income
Series
Social Awareness Series Delaware Series Cash Reserve Series
REIT Series Small Cap Value Series
</TABLE>
Within limits, you may choose the amount of initial premium desired and the
initial Death Benefit. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Certificate's Surrender Value, or the Certificate may
be fully surrendered at any time, subject to certain limitations.
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
DELAWARE GROUP PREMIUM FUND, INC. INVESTORS SHOULD RETAIN A COPY OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CERTIFICATES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE
CERTIFICATES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK OR CREDIT UNION. THE CERTIFICATES ARE NOT INSURED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER
FEDERAL AGENCY. INVESTMENTS IN THE CERTIFICATES ARE SUBJECT TO VARIOUS RISKS,
INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS OF PRINCIPAL.
DATED DECEMBER 15, 1998
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
<PAGE>
(Continued from cover page)
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (See "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY OR CERTIFICATE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................ 5
SUMMARY.............................................................................. 8
PERFORMANCE INFORMATION.............................................................. 16
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS........... 19
INVESTMENT OBJECTIVES AND POLICIES................................................... 20
INVESTMENT ADVISORY SERVICES......................................................... 21
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................................... 21
VOTING RIGHTS........................................................................ 22
THE CERTIFICATE...................................................................... 23
Enrollment Form for a Certificate.................................................. 23
Free-Look Period................................................................... 23
Conversion Privileges.............................................................. 24
Premium Payments................................................................... 24
Allocation of Net Premiums......................................................... 25
Transfer Privilege................................................................. 25
Election of Death Benefit Options.................................................. 26
Guideline Premium Test and Cash Value Accumulation Test............................ 27
Death Proceeds..................................................................... 27
Change in Death Benefit Option..................................................... 30
Change in Face Amount.............................................................. 30
Certificate Value and Surrender Value.............................................. 31
Payment Options.................................................................... 33
Optional Insurance Benefits........................................................ 33
Surrender.......................................................................... 33
Paid-Up Insurance Option........................................................... 33
Partial Withdrawal................................................................. 34
CHARGES AND DEDUCTIONS............................................................... 34
Premium Expense Charge............................................................. 34
Monthly Deduction from Certificate Value........................................... 35
Charges Reflected in the Assets of the Separate Account............................ 38
Surrender Charge................................................................... 38
Charges on Partial Withdrawal...................................................... 39
Transfer Charges................................................................... 40
Charge for Change in Face Amount................................................... 41
Other Administrative Charges....................................................... 41
CERTIFICATE LOANS.................................................................... 41
CERTIFICATE TERMINATION AND REINSTATEMENT............................................ 42
OTHER CERTIFICATE PROVISIONS......................................................... 44
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY...................................... 46
DISTRIBUTION......................................................................... 47
REPORTS.............................................................................. 48
LEGAL PROCEEDINGS.................................................................... 48
FURTHER INFORMATION.................................................................. 48
INDEPENDENT ACCOUNTANTS.............................................................. 48
FEDERAL TAX CONSIDERATIONS........................................................... 48
The Company and the Separate Account............................................... 49
Taxation of the Certificates....................................................... 49
Certificate Loans.................................................................. 50
Modified Endowment Contracts....................................................... 50
MORE INFORMATION ABOUT THE GENERAL ACCOUNT........................................... 50
YEAR 2000 DISCLOSURE................................................................. 52
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS................................................................. 53
APPENDIX A -- OPTIONAL BENEFITS...................................................... A-1
APPENDIX B -- PAYMENT OPTIONS........................................................ B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES AND ACCUMULATED
PREMIUMS............................................................................ C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES............................... D-1
UNAUDITED FINANCIAL STATEMENTS....................................................... UF-1
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
COMPANY: Allmerica Financial Life Insurance and Annuity Company.
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard Ordinary
Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex
Certificates), net investment earnings at an annual effective rate of 5%, and
fees and charges as set forth in the Certificate and any
5
<PAGE>
Certificate riders. The Death Benefit Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
MINIMUM DEATH BENEFIT: The minimum Death Benefit required to qualify the
Certificate as "life insurance" under federal tax laws. The Minimum Death
Benefit varies by Age. It is calculated by multiplying the Certificate Value by
a percentage determined by the Insured's Age.
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
NET PREMIUM: An amount equal to the premium less any premium expense charge.
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Series of Delaware Group Premium
Fund, Inc. or the Money Market Fund of Allmerica Investment Trust.
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
6
<PAGE>
UNDERLYING FUNDS ("FUNDS"): The Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, International Equity Series, Emerging Markets Series, Delaware
Series, Delchester Series, Capital Reserves Series, Strategic Income Series and
Cash Reserve Series of Delaware Group Premium Fund, Inc. and the Money Market
Fund of Allmerica Investment Trust.
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
UNIT: A measure of your interest in a Sub-Account.
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, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
WRITTEN REQUEST: A request by the Certificate Owner in writing, satisfactory to
the Company.
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
7
<PAGE>
SUMMARY
THE CERTIFICATE
The Certificate issued under a group flexible premium variable life policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
- life insurance coverage on the named Insured;
- Certificate Value;
- surrender rights and partial withdrawal rights;
- loan privileges; and
- in some cases, additional insurance benefits available by rider for an
additional charge.
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. Although you may establish a schedule of premium payments
("planned premium payments"), failure to make the planned premium payments will
not necessarily cause a Certificate to lapse, nor will making the planned
premium payments guarantee that a Certificate will remain in force. Thus, you
may, but are not required to, pay additional premiums.
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
SURRENDER CHARGES
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the
8
<PAGE>
maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
A separate surrender charge may apply to and be calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge of up to $8.50
per thousand dollars of increase, and (b) is a deferred sales charge of up to
50% (less any premium expense charge not associated with state and local premium
taxes) of premiums associated with the increase, up to the Guideline Annual
Premium for the increase. In accordance with limitations under state insurance
regulations, the amount of the surrender charge will not exceed a specified
amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge."
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from zero to 1% of premiums, depending on the group to which
the Policy is issued. The charge for distribution expenses may range from zero
to 10%. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-
9
<PAGE>
Account to which it relates on a Monthly Processing Date, the unpaid balance
will be totaled and the Company will make a Pro-Rata Allocation.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value."
TRANSACTION CHARGES
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
TRANSFER CHARGE
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
CHARGES OF THE UNDERLYING INVESTMENT FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. See CHARGES AND
DEDUCTIONS -- "Charges Reflected in the Assets of the Separate Account." The
levels of fees and expenses vary among the Underlying Investment Funds.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has
10
<PAGE>
been allocated, and partial withdrawals. The Certificate Value may be relevant
to the computation of the Death Proceeds. You bear the entire investment risk
for amounts allocated to the Separate Account. The Company does not guarantee a
minimum Certificate Value.
The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
DEATH PROCEEDS
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the Face Amount plus the Certificate Value or the Minimum Death
Benefit. The Minimum Death Benefit is equivalent to a percentage (determined
each month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE CERTIFICATE -- "Death Proceeds."
The Death Proceeds under the Certificate may be received in a lump sum or under
one of the Payment Options the Company offers. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST DEATH BENEFIT
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Change in Face Amount."
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider and Exchange
Option Rider. See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
CERTIFICATE ISSUANCE
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the
11
<PAGE>
enrollment form and medical examination, if any, are completed. If the proposed
Insured cannot answer the eligibility questions "No," and if the proposed
Insured is not a standard risk, insurance coverage will begin only after the
Company (1) approves the enrollment form, (2) the Certificate is delivered and
accepted, and (3) the first premium is paid.
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
If your Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be allocated to the Money Market Fund of the Trust upon
Issuance and Acceptance of the Certificate. All Certificate Value will be
allocated as you have chosen no later than the expiration of the period during
which you may exercise the "Right-to-Examine Certificate" provision.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
INVESTMENT OPTIONS
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account is currently comprised
of 41 Sub-Accounts. Of these 41 Sub-Accounts, 15 are available to the
Certificates. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of the Delaware Group Premium Fund, Inc. ("DGPF") managed by Delaware
International Advisers, Ltd. ("Delaware International"); and Delaware Management
Company, Inc. ("Delaware Management") or the Allmerica Investment Trust managed
by Allmerica Financial Investment Management Services, Inc. ("AFIMS"). In some
states, insurance regulations may restrict the availability of particular
Underlying Funds. The Certificates permit you to transfer Certificate Value
among the available Sub-Accounts and between the Sub-Accounts and the General
Account, subject to certain limitations described under THE CERTIFICATE --
"Transfer Privilege."
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table
12
<PAGE>
shows the expenses of the Underlying Funds for 1997. For more information
concerning fees and expenses, see the prospectus of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AFTER ANY TOTAL EXPENSES
VOLUNTARY OTHER FUND (AFTER ANY
UNDERLYING FUND WAIVER) EXPENSES APPLICABLE LIMITATIONS)
- ------------------------------------------------------------- ------------------ ------------- -----------------------
<S> <C> <C> <C>
Decatur Total Return Series.................................. 0.60% 0.11% 0.71%(2)
Devon Series................................................. 0.54% 0.26% 0.80%(1)(2)
DelCap Series................................................ 0.63% 0.22% 0.85%(1)(2)
Social Awareness Series...................................... 0.20% 0.65% 0.85%(1)(2)
REIT Series(@)............................................... 0.75% 0.10% 0.85%(1)(2)
Small Cap Value Series....................................... 0.60% 0.25% 0.85%(1)(2)
Trend Series................................................. 0.62% 0.23% 0.85%(1)(2)
International Equity Series.................................. 0.75% 0.15% 0.90%(1)(2)
Emerging Markets Series...................................... 0.30% 1.20% 1.50%(1)(2)
Delaware Series.............................................. 0.60% 0.07% 0.67%(2)
Delchester Series............................................ 0.60% 0.10% 0.70%(2)
Capital Reserves Series...................................... 0.60% 0.15% 0.75%(2)
Strategic Income Series...................................... 0.22% 0.58% 0.80%(1)(2)
Cash Reserve Series.......................................... 0.50% 0.14% 0.64%(2)
Money Market Fund............................................ 0.27% 0.08% 0.35%(4)
</TABLE>
(@) Estimated after expense reimbursement.
(1) For the fiscal year ended December 31, 1997, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.91% for Devon Series, 0.87% for DelCap
Series, 1.40% for Social Awareness Series (formerly known as "Quantum Series"),
0.90% for Small Cap Value Series (formerly known as "Value Series"), 0.88% for
Trend Series, 90% for International Equity Series, 2.45% for Emerging Markets
Series, and 1.23% for Strategic Income Series.
(2) The investment adviser for the Decatur Total Return Series, Devon Series,
DelCap Series, Social Awareness Series, REIT Series, Small Cap Value Series,
Trend Series, Delaware Series, Delchester Series, Capital Reserves Series,
Strategic Income Series, and Cash Reserve Series is Delaware Management Company,
Inc. ("Delaware Management"). The Investment Adviser for the International
Equity Series and Emerging Markets Series is Delaware International Advisers
Ltd. ("Delaware International"). Effective November 1, 1998 through April 30,
1999, the investment advisers for the Series of DGPF have agreed voluntarily to
waive their management fees and reimburse each Series for expenses to the extent
that total expenses will not exceed 1.50% for the Emerging Markets Series; 0.95%
for the International Equity Series; 85% for DelCap Series, Social Awareness
Series, REIT Series, Small Cap Value Series and Trend Series, and 0.80% for all
other Series. The fee ratios shown above have been restated, if necessary, to
assume that the new voluntary limitations took effect on January 1, 1997. The
declaration of a voluntary expense limitation does not bind the investment
advisers to declare future expense limitations with respect to these Funds.
(3) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntary limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.
(4) Until further notice, AFIMS has declared a voluntary expense limitation of
0.60% for the Money Market Fund. The total operating expenses of this Fund was
less than its expense limitation throughout 1997.
13
<PAGE>
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
If your Certificate provides for a full refund of the initial premium under its
"Right-to-Examine Certificate" provision as required in your state, your refund
will be the greater of (a) your entire premium, or (b) the Certificate Value
plus deductions under the Certificate, or by the Underlying Funds for taxes,
charges or fees. If your Certificate does not provide for a full refund of the
initial premium, you will receive the Certificate Value in the Separate Account,
plus premiums paid, including fees and charges, minus the amounts allocated to
the Separate Account, plus the fees and charges imposed on amounts in the
Separate Account. After an increase in The Face Amount, a right to cancel the
increase also applies. See THE CERTIFICATE -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24 Certificate months after the date of an
increase in the Face Amount. Where required by state law, and at your request,
the Company will issue a flexible premium adjustable life insurance Certificate
to you. The new Certificate will have the same face amount, issue Age, Date of
Issue, and risk classifications as the original Certificate. See THE CERTIFICATE
- -- "Conversion Privileges."
PARTIAL WITHDRAWAL
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by the amount of the partial withdrawal charge
deducted. See THE CERTIFICATE -- "Partial Withdrawal" and CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal."
LOAN PRIVILEGE
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge, Monthly Deductions, and
interest on the Certificate loan to the end of the Certificate year. Thereafter,
Loan Value is 90% of an amount equal to Certificate Value less the surrender
charge.
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the
14
<PAGE>
Accounts. In either case, Certificate Value equal to the Certificate loan will
be transferred from the appropriate Sub-Accounts to the General Account, and
will earn monthly interest at an effective annual rate of at least 6%.
Therefore, a Certificate loan may have a permanent impact on the Certificate
Value even though it is eventually repaid. Although the loan amount is a part of
the Certificate Value, the Death Proceeds will be reduced by the amount of
outstanding Debt at the time of death.
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
CERTIFICATE LAPSE AND REINSTATEMENT
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
TAX TREATMENT
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Certificate. Death Proceeds under the Certificate are excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
15
<PAGE>
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
The Certificate summarizes the provisions of the group Policy under which it is
issued, which has the purpose of providing insurance protection for the
Beneficiary named therein. References to Certificate rights and features are
intended to represent a Certificate Owner's rights and benefits under the group
Policy. This Summary is intended to provide only a very brief overview of the
more significant aspects of the Certificate. Further detail is provided in this
Prospectus, the Certificate and the group Policy. No claim is made that the
Certificate is in any way similar or comparable to a systematic investment plan
of a mutual fund.
PERFORMANCE INFORMATION
The Certificates were first offered to the public in 1995. However, the Company
may advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Underlying Funds have been in
existence (Tables I(A) and I(B)). The results for any period prior to the
Certificates being offered will be calculated as if the Certificates had been
offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in Table I) under a
"representative" Certificate that is surrendered at the end of the applicable
period. For more information on charges under the Certificates, see CHARGES AND
DEDUCTIONS.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare 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 life separate accounts or other
investment products tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds and other investment products
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons, such as Morningstar, Inc., who
rank such investment products on overall performance or other criteria; or (3)
the Consumer Price Index (a measure for inflation) to assess the real rate of
return from an investment. 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 Services, Inc. ("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
Portfolios.
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. 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.
16
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (non-smoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
<TABLE>
<CAPTION>
TEN YEARS
FOR YEAR OR SINCE
ENDED FIVE INCEPTION
UNDERLYING FUND 12/31/97 YEARS (IF LESS)
- ------------------------------------------------------------------------ ------------ ---------- ------------
<S> <C> <C> <C>
Decatur Total Return Series............................................. -90.25% 12.90% 9.10%
Devon Series............................................................ N/A N/A -95.46%
DelCap Series........................................................... -100.00% 5.93% 6.05%
Social Awareness Series................................................. N/A N/A -94.81%
REIT Series............................................................. N/A N/A N/A
Small Cap Value Series.................................................. -88.56% N/A 9.31%
Trend Series............................................................ -98.73% N/A 6.70%
International Equity Series............................................. -100.00% N/A 4.50%
Emerging Markets Series................................................. N/A N/A -100.00%
Delaware Series......................................................... -94.30% 7.93% 9.57%
Delchester Series....................................................... -100.00% 3.90% 6.37%
Capital Reserves Series................................................. -100.00% -0.88% 2.56%
Strategic Income Series................................................. N/A N/A -100.00%
Cash Reserve Series..................................................... -100.00% -2.57% 0.75%
Money Market Fund....................................................... -100.00% -2.30% 1.46%
</TABLE>
The inception dates for the Underlying Funds are: 10/29/92 for the International
Equity Series; 12/27/93 for the Small Cap Value and Trend Series; 7/02/91 for
the DelCap Series; 7/28/88 for the Delaware Series, the Decatur Total Return
Series, the Delchester Series, the Capital Reserves Series, and the Cash Reserve
Series; and 5/1/97 for the Devon Series, the Social Awareness Series, the
Emerging Markets Series, and the Strategic Income Series and 4/29/85 for the
Money Market Fund.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
17
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE
OR SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
<TABLE>
<CAPTION>
TEN YEARS
FOR YEAR OR SINCE
ENDED FIVE INCEPTION
UNDERLYING FUND 12/31/97 YEARS (IF LESS)
- ------------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Decatur Total Return Series.................................................... 29.95% 18.96% 12.54%
Devon Series................................................................... N/A N/A 26.62%
DelCap Series.................................................................. 13.98% 11.98% 10.93%
Social Awareness Series........................................................ N/A N/A 27.72%
REIT Series.................................................................... N/A N/A N/A
Small Cap Value Series......................................................... 31.84% N/A 19.00%
Trend Series................................................................... 20.40% N/A 16.48%
International Equity Series.................................................... 5.75% N/A 10.41%
Emerging Markets Series........................................................ N/A N/A -11.67%
Delaware Series................................................................ 25.39% 13.99% 13.00%
Delchester Series.............................................................. 12.72% 9.95% 9.88%
Capital Reserves Series........................................................ 6.74% 5.18% 6.18%
Strategic Income Series........................................................ N/A N/A 5.63%
Cash Reserve Series............................................................ 4.26% 3.49% 4.44%
Money Market Fund.............................................................. 4.52% 3.77% 4.95%
</TABLE>
The inception dates for the Underlying Funds are: 10/29/92 for the International
Equity Series; 12/27/93 for the Small Cap Value and Trend Series; 7/02/91 for
the DelCap Series; 7/28/88 for the Delaware Series, the Decatur Total Return
Series, the Delchester Series, the Capital Reserves Series, and the Cash Reserve
Series; and 5/1/97 for the Devon Series, the Social Awareness Series, the
Emerging Markets Series, and the Strategic Income Series and 4/29/85 for the
Money Market Fund.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A 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.
18
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000 ("Principal Office"). Prior to
October 1, 1995, the Company was known as SMA Life Assurance Company. As of
December 31, 1997, the Company had over $9.4 billion in assets. The Company 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, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. The Company is an indirectly
wholly owned subsidiary of First Allmerica Financial Life Insurance Company
("First Allmerica"), formerly State Mutual Life Assurance Company of America,
440 Lincoln Street, Worcester, Massachusetts. First Allmerica, organized under
the laws of Massachusetts in 1844, is the fifth oldest life insurance company in
America.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 22, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account and are kept separate and apart from the general assets
of the Company. Under Delaware law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 41 Sub-Accounts. Each Sub-Account is administered and accounted for as part
of the general business of the Company, but the income, capital gains, or
capital losses of each Sub-Account are allocated to such Sub-Account, without
regard to other income, capital gains, or capital losses of the Company or the
other Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio ("Underlying Fund") of the Delaware Group Premium Fund,
Inc. or the Money Market Fund of Allmerica Investment Trust.
DELAWARE GROUP PREMIUM FUND, INC.
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. DGPF
was established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. Fourteen investment
portfolios are available under the Certificates: Decatur Total Return Series,
Devon Series, DelCap Series, Social Awareness Series, REIT Series, Small Cap
Value Series, Trend Series, International Equity Series, Emerging Markets
Series, Delaware Series, Delchester Series, Capital Reserves Series, Strategic
Income Series, and Cash Reserve Series (collectively, the "Underlying Funds").
The assets of each Underlying Fund are held separate from the assets of the
other Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund have no effect on the
investment performance of another Underlying Fund. Shares of the Underlying
Funds are not offered to the general public but solely to separate accounts of
life insurance companies.
19
<PAGE>
The investment adviser for the Decatur Total Return Series, Devon Series, DelCap
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Series, Delchester Series, Capital Reserves Series, Strategic
Income Series, and Cash Reserve Series is Delaware Management Company, Inc.
("Delaware Management"). The investment adviser for the International Equity
Series, and the Emerging Markets Series is Delaware International Advisers Ltd.
("Delaware International").
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds. 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
First Allmerica, the Company, or other affiliated insurance companies. One
investment portfolio of the Trust ("Fund") is available under the Certificates,
issuing a series of shares: the Money Market Fund. Shares of the Trust are not
offered to the general public but solely to the separate account. AFIMS serves
as investment adviser for the Money Market Fund.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANY MAY BE FOUND IN THE
PROSPECTUS WHICH ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ CAREFULLY BEFORE
INVESTING. The statement of additional information of the Underlying Funds is
available upon request. There can be no assurance that the investment objectives
of the Underlying Funds can be achieved.
DECATUR TOTAL RETURN SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income.
DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DELCAP SERIES -- seeks long-term capital appreciation by investing its assets in
a diversified portfolio of securities exhibiting the potential for significant
growth. This Fund formerly was known as the Growth Series.
SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation. It
seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in small cap
common stocks whose market value appears low relative to their underlying value
or future earnings and growth potential. Emphasis also will be placed on
securities of companies that temporarily may be out of favor or whose value is
not yet recognized by the market.
TREND SERIES -- seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective.
20
<PAGE>
INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation. It
seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The Series is an
international fund. As such, under normal market conditions, at least 65% of the
Series' assets will be invested in equity securities of issuers organized or
having a majority of their assets or deriving a majority of their operating
income in at least three countries that are considered to be emerging or
developing.
DELAWARE SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth.
DELCHESTER SERIES -- seeks as high a current income as possible by investing in
rated and unrated corporate bonds (including high-yield bonds commonly known as
"junk bonds"), U.S. government securities and commercial paper. Please read the
Fund's prospectus disclosure regarding the risk factors before investing in this
Series.
CAPITAL RESERVES SERIES -- seeks a high, stable level of current income while
minimizing fluctuations in principal by investing in a diversified portfolio of
short- and intermediate-term securities.
STRATEGIC INCOME SERIES -- seeks high current income and total return. It seeks
to achieve its objective by using a multi-sector investment approach, investing
primarily in three sectors of the fixed-income securities market: high yield,
higher-risk securities; investment grade fixed-income securities; and foreign
government and other foreign fixed-income securities. The Series also may invest
in U.S. equity securities.
CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
MONEY MARKET FUND -- The Money Market Fund is invested in a diversified
portfolio of high-quality, short-term money market instruments with the
objective of obtaining maximum current income consistent with the preservation
of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUS OF
THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
INVESTMENT ADVISORY SERVICES
For managing the portfolios of the Underlying Funds and making the investment
decisions, investment advisers are paid an annual fee by their respective
Underlying Funds. For Delaware Management, this fee is equal to 0.50% of the
average daily net assets of the Cash Reserve Series; 0.60% of the average daily
net assets of the Decatur Total Return Series, Delchester Series, Capital
Reserves Series, Delaware Series and Devon Series; 0.65% of the average daily
net assets of the Strategic Income Series and 0.75% of the average daily net
assets of the DelCap Series, Small Cap Value Series, Trend Series, Social
Awareness Series, and REIT Series.
21
<PAGE>
For Delaware International Advisors, Ltd., this fee is equal to 0.75% of the
average daily net assets of the International Equity Series and 1.25% of the
Emerging Markets Series.
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of the Money Market Fund as follows:
<TABLE>
<S> <C> <C>
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem 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 Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate 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 Certificate
Owners on a basis to be determined by the Company.
Shares of the Series of DGPF are also issued to variable annuity and variable
life separate accounts of other unaffiliated insurance companies ("mixed and
shared funding"). Shares of the Money Market Fund of the Trust are also issued
to separate accounts of the Company and its affiliates which issue variable
annuity and variable life contracts ("mixed funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life contract owners or variable annuity contract owners. Although the
Company, DGPF and the Trust do not currently foresee any such disadvantages to
either variable life insurance contract owners or variable annuity contract
owners, the Company and the respective Trustees intend to monitor events in
order to identify any material conflicts between such contract owners and to
determine what action, if any, should be taken in response thereto. If the
Trustees were to conclude that separate funds should be established for variable
life and variable annuity separate accounts, the Company will bear the attendant
expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement change, the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
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<PAGE>
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. 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 Certificates, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Certificate Owners or the Trustees. The Company's disapproval of
any such change must be reasonable and, in the case of a change in investment
policies or investment adviser, based on a good faith determination that such
change would be contrary to state law or otherwise is inappropriate in light of
the objectives and purposes of the Underlying Funds. In the event the Company
does disregard voting instructions, a summary of and the reasons for that action
will be included in the next periodic report to Certificate Owners.
THE CERTIFICATE
ENROLLMENT FORM FOR A CERTIFICATE
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company (1) approves
the enrollment form, (2) the Certificate is delivered and accepted, and (3) the
first premium is paid.
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<PAGE>
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt of the premium at the Principal Office. If the
Certificate is not issued, the premiums will be returned to you without
interest.
If the Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be transferred to the Sub-Account investing in the Cash
Reserve Series of DGPF upon Issuance and Acceptance of the Certificate. All
Certificate Value will be allocated as you have chosen not later than the
expiration of the period during which you may exercise the "Right-to-Examine
Certificate" provision. If the "Payor Provision" is in effect, (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Payor Provisions"), Payor premiums which are
not "excess premiums" will be transferred to the Monthly Deduction Sub-Account
not later than three days after underwriting approval of the Certificate.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will, within seven days, mail a
refund. (The refund of any premium paid by check may be delayed until the check
has cleared your bank.) If the Certificate provides for a full refund of the
initial premium under its "Right-to-Examine Certificate" provision as required
in your state, your refund will be the greater of (a) your entire premium, or
(b) the Certificate Value plus deductions under the Certificate or by the
Underlying Funds for taxes, charges or fees. If the Certificate does not provide
for a full refund of the initial premium, you will receive the Certificate Value
in the Separate Account, plus premiums paid, including fees and charges, minus
the amounts allocated to the Separate Account, plus the fees and charges imposed
on amounts in the Separate Account.
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but for the increase. The amount to be
credited will be refunded if you so request. The Company will also waive any
surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
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<PAGE>
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $50.
Premiums are not limited as to frequency and number. However, no premium payment
may be less than $100 without the Company's consent. Moreover, premium payments
must be sufficient to cover the next Monthly Deduction plus loan interest
accrued, or the Certificate may lapse. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Certificate, if required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the
Death Benefit Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Certificate during a
Certificate year. See CERTIFICATE TERMINATION AND REINSTATEMENT.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%. You may change the allocation of future Net
Premiums at any time pursuant to written or telephone request. If allocation
changes by telephone are elected by the Certificate Owner, a properly completed
authorization form must be on file before telephone requests will be honored.
The policy of the Company and its agents and affiliates is that they will not be
responsible for losses resulting from acting upon telephone requests reasonably
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a
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<PAGE>
Certificate Owner identify themselves by name and identify the Certificate Owner
by name, date of birth and social security number. All transfer instructions by
telephone are tape recorded. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. No charge is currently
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Transfers involving the General Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the General Account; and
(b) The amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Certificate.
These rules are subject to change by the Company.
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Account which invests in the Money Market Fund of the Trust to
one or more of the other Sub-Accounts ("Dollar Cost Averaging Option"), or (b)
to automatically reallocate Certificate Value among the Sub-Accounts ("Automatic
Rebalancing Option"). Automatic transfers may be made on a monthly, bimonthly,
quarterly, semiannual or annual schedule. Generally, all transfers will be
processed on the 15th of each scheduled month. However, if the 15th is not a
business day or is the Monthly Processing Date, the automatic transfer will be
processed on the next business day. The Dollar Cost Averaging Option and the
Automatic Rebalancing Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and (4)
the maximum amount that may be transferred each time from the General Account.
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge.
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Any transfers made with respect to a conversion privilege, Certificate loan or
material change in investment policy will not count towards the twelve free
transfers.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a minimum death benefit in relation to cash value for a
Certificate to qualify as life insurance. Under current federal tax law, either
the Guideline Premium test or the Cash Value Accumulation test can be used to
determine if the Certificate complies with the definition of "life insurance" in
Section 7702 of the Code. At the time of application, the Employer may elect
either of the tests.
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. If the Cash Value Accumulation
test is chosen by the employer, ONLY Death Benefit Option 3 will apply. Death
Benefits Option 1 and Option 2 are NOT available under the Cash Value
Accumulation test.
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the minimum
Death Benefit relative to the Certificate Value are different. Required
increases in the minimum Death Benefit due to growth in Certificate Value will
generally be greater under the Cash Value Accumulation test than under the
Guideline Premium test. APPLICANTS FOR A POLICY SHOULD CONSULT A QUALIFIED TAX
ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
OPTION 1 -- LEVEL DEATH BENEFIT
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Minimum Death Benefit, as set forth in the table below. Under Option 1, the
Death Benefit will remain level unless the Minimum Death Benefit is greater than
the Face Amount, in which case the Death Benefit will vary as the Certificate
Value varies. Option 1 will offer the best opportunity for the Certificate Value
under a Certificate to increase without increasing the Death Benefit as quickly
as it might under the other options. The Death Benefit will never go below the
Face Amount.
OPTION 2 -- ADJUSTABLE DEATH BENEFIT
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Minimum Death Benefit, as set forth in the
table below. The Death Benefit will, therefore, vary as the Certificate Value
changes, but will never be less than the Face Amount. Option 2 will offer the
best opportunity for the Certificate Owner who would like to have an increasing
Death Benefit as early as possible. The Death Benefit will increase whenever
there is an increase in the Certificate Value, and will decrease whenever there
is a decrease in the Certificate Value, but will never go below the Face Amount.
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the
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Certificate at the "seven-pay" limit for the full seven years. When the
Certificate Value multiplied by the applicable Death Benefit Factor exceeds the
Face Amount, the Death Benefit will increase whenever there is an increase in
the Certificate Value, and will decrease whenever there is a decrease in the
Certificate Value, but will never go below the Face Amount. OPTION 3 MAY NOT BE
AVAILABLE IN ALL STATES.
DEATH PROCEEDS
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will be determined as of the date of the
Company's receipt of due proof of the Insured's death.
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
The Minimum Death Benefit under Option 1 or Option 2 is equal to a percentage of
the Certificate Value as set forth below. The Minimum Death Benefit is
determined in accordance with the Code regulations to ensure that the
Certificate qualifies as a life insurance contract and that the insurance
proceeds may be excluded from the gross income of the Beneficiary.
MINIMUM DEATH BENEFIT TABLE
(Option 1 and Option 2)
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Certificate Value
- ---------------------------------------------------------- -------------------
<S> <C>
40 and under.......................................... 250%
45.................................................... 215%
50.................................................... 185%
55.................................................... 150%
60.................................................... 130%
65.................................................... 120%
70.................................................... 115%
75.................................................... 105%
80.................................................... 105%
85.................................................... 105%
90.................................................... 105%
95 and above.......................................... 100%
</TABLE>
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<PAGE>
For the Ages not listed, the progression between the listed Ages is linear.
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
ILLUSTRATION OF OPTION 1
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt.
Under Option 1, a Certificate with a $50,000 Face Amount will generally have a
Death Benefit equal to $50,000. However, because the Death Benefit must be equal
to or greater than 250% of Certificate Value, if at any time the Certificate
Value exceeds $20,000, the Death Benefit will exceed the $50,000 Face Amount. In
this example, each additional dollar of Certificate Value above $20,000 will
increase the Death Benefit by $2.50. For example, a Certificate with a
Certificate Value of $35,000 will have a Minimum Death Benefit of $87,500
($35,000 X 2.50); Certificate Value of $40,000 will produce a Minimum Death
Benefit of $100,000 ($40,000 X 2.50); and Certificate Value of $50,000 will
produce a Minimum Death Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
ILLUSTRATION OF OPTION 2
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Minimum Death Benefit will be $87,500 ($35,000 X 2.50); Certificate
Value of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X
2.50); and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
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<PAGE>
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is less than the Face Amount plus
Certificate Value, then the Death Benefit will be the current Face Amount plus
Certificate Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
CHANGE IN DEATH BENEFIT OPTION
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of the request. No charges will be imposed on changes in Death Benefit Options.
IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Minimum Death Benefit). The
cost of insurance may be higher or lower than it otherwise would have been since
any increases or decreases in Certificate Value will, respectively, reduce or
increase the Insurance Amount at Risk under Option 1. Assuming a positive net
investment return with respect to any amounts in the Separate Account, changing
the Death Benefit Option from Option 2 to Option 1 will reduce the Insurance
Amount at Risk and, therefore, the cost of insurance charge for all subsequent
Monthly Deductions, compared to what such charge would have been if no such
change were made. If the Death Benefit Option is changed from Option 1 to Option
2, the Face Amount will be decreased to equal the Death Benefit less the
Certificate Value on the effective date of the change. This change may not be
made if it would result in a Face Amount less than $40,000. A change from Option
1 to Option 2 will not alter the amount of the Death Benefit at the time of the
change, but will affect the determination of the Death Benefit from that point
on. Because the Certificate Value will be added to the new specified Face
Amount, the Death Benefit will vary with the Certificate Value. Thus, under
Option 2, the Insurance Amount at Risk will always equal the Face Amount unless
the Minimum Death Benefit is in effect. The cost of insurance may also be higher
or lower than it otherwise would have been without the change in Death Benefit
Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Certificate
Value."
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
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CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
INCREASES
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than an amount determined by the Company. This amount varies by
group but in no event will this amount exceed $10,000. You may not increase the
Face Amount after the Insured reaches Age 80. An increase must be accompanied by
an additional premium if the Certificate Value is less than $50 plus an amount
equal to the sum of two Monthly Deductions. On the effective date of each
increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. A surrender charge
will also be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and (2)
during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
DECREASES
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the decrease may be limited or Certificate Value may be returned to the
Certificate Owner (at your election) to the extent necessary to meet the
requirements. A return of Certificate Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
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If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined.
Certificate Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the General Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Certificate.
CALCULATION OF CERTIFICATE VALUE
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
CERTIFICATE -- "Enrollment Form for a Certificate") less any Monthly Deductions
due. On each Valuation Date after the Date of Issue the Certificate Value will
be:
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
determined for each Sub-Account by multiplying the value of a Unit in that
Sub-Account on that date by the number of such Units allocated to the
Certificate; PLUS
(2) the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
THE UNIT
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by
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multiplying the dollar value of the corresponding Unit as of the immediately
preceding Valuation Date by the appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any; and
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period.
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor.
Allocations to the General Account are not converted into Units, but are
credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
SURRENDER
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
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PAID-UP INSURANCE OPTION
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING CERTIFICATE OWNER
RIGHTS AND BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit will be computed
differently from the net Death Benefit and the Death Benefit options will
not apply.
- We will not allow transfers of Certificate Value from the General Account
back to the Separate Account.
- You may not make further payments.
- You may not increase or decrease the Face Amount or make partial
withdrawals.
- Riders will continue only with our consent.
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
PARTIAL WITHDRAWAL
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal." The Company will normally pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but
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the Company may delay payment under certain circumstances described in OTHER
CERTIFICATE PROVISIONS -- "Postponement of Payments." For important tax
consequences which may result from partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. Upon
request, the Company may permit all or part of the Premium and Expense Charge to
be deducted as part of the Monthly Deductions. The premium tax charge may change
when either the applicable jurisdiction changes or the tax rate within the
applicable jurisdiction changes. The Company should be notified of any change in
address of the Insured as soon as possible.
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 10%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See "Charge for Change in Face
Amount."
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
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The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the Face Amount. Because the cost of insurance depends
upon a number of variables, it can vary from month to month and from group to
group.
CALCULATION OF THE CHARGE
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Minimum Death Benefit is not in effect.
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit Option
1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face Amount reduced by any Certificate Value
(minus rider charges) in excess of the initial Face Amount at the beginning of
the Certificate month.
If the Minimum Death Benefit is in effect under any Option, a monthly cost of
insurance charge will also be calculated for that portion of the Death Benefit
which exceeds the current Face Amount. This charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Minimum Death Benefit (Certificate Value times the
applicable percentage), MINUS
- the greater of the Face Amount or the Certificate Value under Death
Benefit Option 1 or Option 3, or
- the Face Amount plus the Certificate Value under Death Benefit Option 2.
When the Minimum Death Benefit is in effect, the cost of insurance charge for
the initial Face Amount and for any increases will be calculated as set forth in
the preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: Decreases."
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COST OF INSURANCE RATES
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a guaranteed
or simplified underwriting basis. The amount of this portion will be determined
for each group, and may vary based on characteristics within the group.
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; the number of
persons eligible to participate in the plan; expected percentage of eligible
persons participating in the plan; and the amount of guaranteed or simplified
underwriting insurance to be issued. Larger groups, higher participation rates
and occupations with historically favorable mortality rates will generally
result in the individuals within that group being placed in a more favorable
Underwriting Class.
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and
non-smokers. Any change in the cost of insurance rates will apply to all persons
of the same insuring Age and Underwriting Class whose Certificates have been in
force for the same length of time.
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will have a lower cost of insurance than an Insured in a standard Underwriting
Class who, in turn, will have a lower cost of insurance than an Insured in a
substandard Underwriting Class with a higher mortality risk. The Underwriting
Classes may be divided into two categories or aggregated: smokers and
non-smokers. Non-smoking Insureds will incur lower cost of insurance rates than
Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in
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connection with the Certificate. These expenses include the cost of processing
enrollment forms, conducting medical examinations, determining insurability and
the Insured's Underwriting Class, and establishing Certificate records. The
Company does not expect to derive a profit from these charges.
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts 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, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. 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 costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current 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.
CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
Because the Sub-Accounts purchase shares of the Underlying Investment Companies,
the value of the Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Investment Companies. The
prospectuses and Statements of Additional Information of DGPF and the Trust have
additional information concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
SURRENDER CHARGE
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
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A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance of the Certificate is an amount up to the sum of (a) plus (b), where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of up to 50% (less
any premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. This reduction in the maximum
surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
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<PAGE>
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES, for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of withdrawal
(i.e., 15 years have passed from the Date of Issue and from the effective date
of any increase in the Face Amount).
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
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<PAGE>
TRANSFER CHARGES
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund of the Trust to one or more of the other Sub-Accounts, or (b) to
reallocate Certificate Value among the Sub-Accounts. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year. Each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made without
charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account will be free of charge, and in addition to the twelve free transfers in
a Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and
CERTIFICATE LOANS.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
CERTIFICATE LOANS
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments."
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The
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<PAGE>
current credited rate is 7.1%, 8% for preferred loans. NO ADDITIONAL INTEREST
WILL BE CREDITED TO SUCH CERTIFICATE VALUE.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth Certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. The
Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the loan amount, if the new loan amount
exceeds the Certificate Value in the General Account, the Company will transfer
Certificate Value equal to that excess loan amount from the Certificate Value in
each Sub-Account to the General Account as security for the excess loan amount.
The Company will allocate the amount transferred among the Sub-Accounts in the
same proportion that the Certificate Value in each Sub-Account bears to the
total Certificate Value in all Sub-Accounts.
REPAYMENT OF DEBT
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate Account cannot exceed Certificate Value previously transferred from
the Separate Account to secure the Debt.
If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
EFFECT OF CERTIFICATE LOANS
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
CERTIFICATE TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Certificate to lapse
unless:
- the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued; or
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<PAGE>
- if Debt exceeds the Certificate Value.
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
PAYOR PROVISIONS
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of premium which is due.
The premium may be paid during a grace period of 62 days, beginning on the
premium due date. If the necessary premium is not received by the Company within
31 days of the end of the grace period, a second notice will be sent to the
Payor. A 31-day grace period notice at this time will also be sent to you if the
Certificate Value is insufficient to cover the Monthly Deductions then due.
If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
REINSTATEMENT
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
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- a written enrollment form for reinstatement,
- Evidence of Insurability; and
- a premium that, after the deduction of the premium expense charge, is
large enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
CERTIFICATE VALUE ON REINSTATEMENT
The Certificate Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Certificate increased by interest
from the date the payment was received at the Principal Office; PLUS
- an amount equal to the Certificate Value less Debt on the date of default;
MINUS
- the Monthly Deduction due on the date of reinstatement. You may reinstate
any Debt outstanding on the date of default or foreclosure.
OTHER CERTIFICATE PROVISIONS
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
CERTIFICATE OWNER
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while the
Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
is required whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
ASSIGNMENT
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certifi-
cate. All rights under the Certificate will be transferred to the extent of the
assignee's interest. The Consent of the assignee may be required in order to
make changes in premium allocations, to make transfers, or to exercise other
rights under the Certificate. The Company is not bound by an assignment or
release thereof, unless it is in writing and is recorded at the Principal
Office. When recorded, the assignment will take effect as
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<PAGE>
of the date the Written Request was signed. Any rights created by the assignment
will be subject to any payments made or actions taken by the Company before the
assignment is recorded. The Company is not responsible for determining the
validity of any assignment or release.
INCONTESTABILITY
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Certificate,
without interest, less any outstanding Debt and less any partial withdrawals. If
the Insured commits suicide, while sane or insane, within two years from the
effective date of any increase in the Death Benefit, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.
AGE
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers may be postponed whenever: (1) the New York Stock Exchange is
closed other than customary weekend and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the SEC, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Certificate of
any amounts derived from the premiums paid by check may be delayed until such
time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
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<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Assistant Secretary (since 1992),
Director and Vice President (since 1984) of First Allmerica
Abigail M. Armstrong Secretary (since 1996), and Counsel (since 1991) of
Secretary and Counsel First Allmerica
Warren E. Barnes Vice President and Corporate Controller (since 1998) of
Vice President and First Allmerica; Vice President and Co-Controller (since
Corporate Controller 1997) of First Allmerica; Vice President and Assistant
Controller (1996 to 1997) of First Allmerica; Assistant
Vice President and Assistant Controller (1995 to 1996)
of First Allmerica; Assistant Vice President Corporate
Accounting and Reporting (1993 to 1995) of First
Allmerica
Robert E. Bruce Director and Chief Information Officer (since 1997),Vice
Director, Vice President and President (since 1995) of First Allmerica; Corporate
Chief Information Officer Manager (1979 to 1995) of Digital Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and
Director, Vice President and Vice President (since 1991) of First Allmerica
Chief Investment Officer
John F. Kelly Director (since 1996), General Counsel (since 1981),
Director, Vice President and Senior Vice President and Assistant Secretary (since
General Counsel 1986) of First Allmerica
J. Barry May Director and President (since 1996) of First Allmerica;
Director Vice President (1993 to 1996), and General Manager (1989
to 1993) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994), and CEO (since
1996) of Citizens Insurance Company of America; Vice
President (1982 to 1994) and Chief Investment Officer
(1986 to 1994) of First Allmerica
John F. O'Brien Director, Chairman of the Board, President and Chief
Director and Chairman of Executive Officer (since 1989) of First Allmerica
the Board
Edward J. Parry, III Director and Chief Financial Officer (since 1996), and
Director, Vice President, Vice President and Treasurer (since 1993) of First
Treasurer, and Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996), Vice President (since 1990), of
Director, President and First Allmerica; Director (since 1990) of Allmerica
Chief Executive Officer Investments, Inc.; and Director and President (since
1990) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------- --------------------------------------------------------
<S> <C>
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998) of
Travelers Property & Casualty Group; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996), Vice President (since 1990), and
Director and Vice President Chief Financial Officer (1990 to 1996) of First
Allmerica
Phillip E. Soule Director (since 1996), and Vice President (since 1987)
Director of First Allmerica
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Certificates pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer and is
a member of the National Association of Securities Dealers ("NASD"). The
Certificates are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc. or of independent broker-dealers.
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issuance of a
Certificate or an increase in Face Amount, commissions may be up to 25% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 2.5% of first-year,
or 4% of renewal premiums. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales related
criteria. Other payments may be made for other services that do not directly
involve the sales of the Certificates. These services may include the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
REPORTS
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan
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<PAGE>
repayments, lapse, termination for any reason, and reinstatement. An annual
statement will also be sent to you. The annual statement will summarize all of
the above transactions and deductions of charges during the Certificate year. It
will also set forth the status of the Death Proceeds, Certificate Value,
Surrender Value, amounts in the Sub-Accounts and General Account, and any
Certificate loan(s).
In addition, you will be sent periodic reports containing financial statements
and other information for the Separate Account and the Underlying Investment
Companies as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
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 from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, and the financial
statements for the Group VEL Account as of December 31, 1997 and for the periods
indicated, included in this Prospectus 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
Certificates.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax
48
<PAGE>
upon the earnings or realized capital gains attributable to the Separate
Account. Based on these expectations, no charge is made for federal income taxes
which may be attributable to the Separate Account.
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE CERTIFICATES
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See "Modified Endowment Contracts."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
CERTIFICATE LOANS
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may revoke your
request for a preferred loan.
49
<PAGE>
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax deduction for interest is allowed on policy or certificate loans, if the
insured is an officer or employee of, or is financially interested in, any
business carried on by the taxpayer. There is an exception to this rule which
permits a deduction for interest on loans up to $50,000 related to any policies
or certificates covering the greater of (1) five individuals, or (2) the lesser
of (a) 5% of the total number of officers and employees of the corporation, or
(b) 20 individuals.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level premiums.
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any 12-month period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the Certificate and the General
Account may, however, be subject to certain generally applicable provisions of
the Federal Securities Laws concerning the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of
50
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interest. The allocation or transfer of funds to the General Account does not
entitle you to share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General Account, plus interest at the
Guaranteed Minimum Rate, plus any excess interest which the Company credits,
less the sum of all Certificate charges allocable to the General Account and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
THE CERTIFICATE
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CERTIFICATE LOANS
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate. Partial withdrawals are made on a
last-in/first-out basis from Certificate Value allocated to the General Account.
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
Certificate loans may also be made from the Certificate Value in the General
Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
51
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YEAR 2000 DISCLOSURE
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
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 Company's contingency plans related to the Year 2000 issue are addressed in
a plan developed jointly with an outside vendor. The plan contains immediate
steps to keep business functions operating while unforeseen Year 2000 issues are
being addressed. It outlines responses to situations that may affect critical
business functions and also provides triage guidance, a documented order of
actions to respond to problems. During the triage process, business priorities
are established and "Critical Points of Failure" are identified as having a
significant impact on the business. The Company's contingency plans are designed
to keep a business unit's operation functioning in the event of a failure or
delay due to Year 2000 record format and date calculation changes.
52
<PAGE>
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.
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Separate Account are included
in this Prospectus beginning immediately after the Appendices. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account. The financial statements
for the Sub-Accounts investing in the portfolios of DGPF and the Trust are not
included because sales have not yet begun.
53
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APPENDIX A
OPTIONAL BENFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. The following supplemental benefits are
available for issue under the Certificates for an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that, during periods of total disability continuing for more
than the period of time specified in the Rider, the Company will add to the
Certificate Value each month an amount selected by you or the amount necessary
to maintain the Certificate in force, whichever is greater. This benefit is
subject to the Company's maximum issue benefits. Its cost may change yearly.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present, this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "Other Insured" to
convert the coverage to a flexible premium adjustable life insurance
Certificate.
CHILDREN'S INSURANCE RIDER
This Rider provides coverage for eligible minor children. It also covers future
children, including adopted children and stepchildren.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Certificate anniversary nearest the Insured's Age 70.
OPTION TO ACCELERATE BENEFITS RIDER
This Rider permits part of the proceeds of the Certificate to be available
before death if the Insured becomes terminally ill and, depending on the group
to which the Policy is issued, may also pay part of the proceeds if the Insured
is permanently confined to a nursing home.
EXCHANGE OPTION RIDER
This Rider allows you to use the Certificate to insure a different person,
subject to Company guidelines.
EXCHANGE TO TERM INSURANCE RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An exchange
credit will be paid to the Certificate Owner or the corporate assignee in the
case of a corporate-sponsored collateral assignment split dollar arrangement.
CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL STATES.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options then offered by the
Company. If you do not make an election, the Company will pay the benefits in a
single sum. A certificate will be provided to the payee describing the payment
option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that otherwise would be deducted from the Death Benefit.
The amounts payable under a payment option are paid from the General Account.
These amounts are not based on the investment experience of the Separate
Account.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
B-1
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APPENDIX C
ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Certificate's Sum Insured and
Certificate Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Certificate issued to a person, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Certificate
issued to a person, Age 45, under a standard Premium Class and qualifying for
the non-smoker discount. The tables illustrate the guaranteed cost of insurance
rates and the current cost of insurance rates as presently in effect.
The tables illustrate the Certificate Values that would result based upon the
assumptions that no Certificate loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Certificate year (so that no transaction or transfer charges have been
incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested each year to earn interest (after taxes) at 5%
compounded annually.
The Certificate Values and Death Proceeds would be different from those shown if
the gross annual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below such averages for individual
Certificate years. The values would also be different depending on the
allocation of a Certificate's total Certificate Value among the Sub-Accounts of
the Separate Account, if the actual rates of return averaged 0%, 6% or 12%, but
the rates of each Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Certificate Values take into
account the deduction from premium for the tax expense charge, the Monthly
Deduction from Certificate Value, and the daily charge against the Separate
Account for mortality and expense risks. In both the Current Cost of Insurance
Charges tables and the Guaranteed Cost of Insurance Charges tables, the Separate
Account charge for morality and expense risks is equivalent to an effective
annual rate of 0.90% of the average daily value of the assets in the Separate
Account attributable to the Certificates.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Fund. The actual fees
and expenses of each Underlying Fund vary and, in 1997, ranged from an annual
rate of 0.35% to an annual rate of 1.50% of average daily net assets. The fees
and expenses associated with the Certificate may be more or less than 0.85% in
the aggregate, depending upon how you make allocations of the Certificate Value
among the Sub-Accounts.
For the fiscal year ended December 31, 1997, before waiver and/or reimbursement
by the investment adviser, total Series expenses as a percentage of average
daily net assets were 0.91% for Devon Series, 0.87% for DelCap Series, 1.40% for
Social Awareness Series (formerly known as "Quantum Series"), 0.90% for Small
C-1
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Cap Value Series (formerly known as "Value Series"), 0.88% for Trend Series, 90%
for International Equity Series, 2.45% for Emerging Markets Series, and 1.23%
for Strategic Income Series.
The investment adviser for the Decatur Total Return Series, Devon Series, DelCap
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, Delaware Series, Delchester Series, Capital Reserves Series, Strategic
Income Series, and Cash Reserve Series is Delaware Management Company, Inc.
("Delaware Management"). The Investment Adviser for the International Equity
Series and Emerging Markets Series is Delaware International Advisers Ltd.
("Delaware International"). Effective November 1, 1998 through April 30, 1999,
the investment advisers for the Series of DGPF have agreed voluntarily to waive
their management fees and reimburse each Series for expenses to the extent that
total expenses will not exceed 1.50% for the Emerging Markets Series; 0.95% for
the International Equity Series; 85% for DelCap Series, Social Awareness Series,
REIT Series, Small Cap Value Series and Trend Series, and 0.80% for all other
Series. The fee ratios shown above have been restated, if necessary, to assume
that the new voluntary limitations took effect on January 1, 1997. The
declaration of a voluntary expense limitation does not bind the investment
advisers to declare future expense limitations with respect to these Funds.
Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through April 30, 1999. The fee ratios shown above have been adjusted to assume
that the new voluntary limitation took effect on January 1, 1997. In 1997, the
actual ratio of total annual expenses of the International Equity Series was
0.85%, and the actual management fee ratio was 0.70%.
Until further notice, AFIMS has declared a voluntary expense limitation of 0.60%
for the Money Market Fund. The total operating expenses of this Fund was less
than its expense limitation throughout 1997.
NET ANNUAL RATES OF INVESTMENT
Taking into account the 0.90% charge to the Separate Account and the assumed
0.85% charge for Underlying Investment Company advisory fees and operating
expenses, the gross annual rates of investment return of 0%, 6% and 12%
correspond to net annual rates of -1.75%, 4.25%, and 10.25%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,383 250,000 218 3,603 250,000 438 3,823 250,000
2 9,041 2,827 6,680 250,000 3,479 7,333 250,000 4,159 8,013 250,000
3 13,903 7,761 9,892 250,000 9,063 11,194 250,000 10,473 12,604 250,000
4 19,008 11,951 13,017 250,000 14,122 15,188 250,000 16,570 17,636 250,000
5 24,368 16,054 16,054 250,000 19,321 19,321 250,000 23,155 23,155 250,000
6 29,996 19,003 19,003 250,000 23,597 23,597 250,000 29,211 29,211 250,000
7 35,906 21,857 21,857 250,000 28,015 28,015 250,000 35,855 35,855 250,000
8 42,112 24,619 24,619 250,000 32,583 32,583 250,000 43,149 43,149 250,000
9 48,627 27,286 27,286 250,000 37,306 37,306 250,000 51,162 51,162 250,000
10 55,469 29,856 29,856 250,000 42,187 42,187 250,000 59,969 59,969 250,000
11 62,652 32,325 32,325 250,000 47,231 47,231 250,000 69,654 69,654 250,000
12 70,195 34,661 34,661 250,000 52,414 52,414 250,000 80,288 80,288 250,000
13 78,114 36,861 36,861 250,000 57,742 57,742 250,000 91,975 91,975 250,000
14 86,430 38,929 38,929 250,000 63,227 63,227 250,000 104,842 104,842 250,000
15 95,161 40,855 40,855 250,000 68,870 68,870 250,000 119,022 119,022 250,000
16 104,330 42,630 42,630 250,000 74,674 74,674 250,000 134,664 134,664 250,000
17 113,956 44,274 44,274 250,000 80,667 80,667 250,000 151,959 151,959 250,000
18 124,064 45,775 45,775 250,000 86,854 86,854 250,000 171,102 171,102 250,000
19 134,677 47,121 47,121 250,000 93,239 93,239 250,000 192,319 192,319 250,000
20 145,821 48,298 48,298 250,000 99,829 99,829 250,000 215,838 215,838 263,323
Age 60 95,161 40,855 40,855 250,000 68,870 68,870 250,000 119,022 119,022 250,000
Age 65 145,821 48,298 48,298 250,000 99,829 99,829 250,000 215,838 215,838 263,323
Age 70 210,477 50,806 50,806 250,000 135,998 135,998 250,000 373,712 373,712 433,506
Age 75 292,995 45,739 45,739 250,000 179,400 179,400 250,000 628,295 628,295 672,275
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,001 250,000 0 3,209 250,000 33 3,418 250,000
2 9,041 2,046 5,899 250,000 2,650 6,504 250,000 3,281 7,134 250,000
3 13,903 6,561 8,692 250,000 7,752 9,883 250,000 9,046 11,177 250,000
4 19,008 10,307 11,373 250,000 12,279 13,345 250,000 14,509 15,574 250,000
5 24,368 13,942 13,942 250,000 16,891 16,891 250,000 20,364 20,364 250,000
6 29,996 16,396 16,396 250,000 20,522 20,522 250,000 25,584 25,584 250,000
7 35,906 18,723 18,723 250,000 24,228 24,228 250,000 31,269 31,269 250,000
8 42,112 20,913 20,913 250,000 28,004 28,004 250,000 37,463 37,463 250,000
9 48,627 22,956 22,956 250,000 31,841 31,841 250,000 44,211 44,211 250,000
10 55,469 24,836 24,836 250,000 35,729 35,729 250,000 51,564 51,564 250,000
11 62,652 26,546 26,546 250,000 39,664 39,664 250,000 59,589 59,589 250,000
12 70,195 28,079 28,079 250,000 43,641 43,641 250,000 68,360 68,360 250,000
13 78,114 29,422 29,422 250,000 47,656 47,656 250,000 77,961 77,961 250,000
14 86,430 30,571 30,571 250,000 51,706 51,706 250,000 88,495 88,495 250,000
15 95,161 31,512 31,512 250,000 55,787 55,787 250,000 100,073 100,073 250,000
16 104,330 32,218 32,218 250,000 59,880 59,880 250,000 112,817 112,817 250,000
17 113,956 32,667 32,667 250,000 63,973 63,973 250,000 126,874 126,874 250,000
18 124,064 32,823 32,823 250,000 68,041 68,041 250,000 142,411 142,411 250,000
19 134,677 32,639 32,639 250,000 72,052 72,052 250,000 159,624 159,624 250,000
20 145,821 32,069 32,069 250,000 75,980 75,980 250,000 178,755 178,755 250,000
Age 60 95,161 31,512 31,512 250,000 55,787 55,787 250,000 100,073 100,073 250,000
Age 65 145,821 32,069 32,069 250,000 75,980 75,980 250,000 178,755 178,755 250,000
Age 70 210,477 21,977 21,977 250,000 93,658 93,658 250,000 310,038 310,038 359,644
Age 75 292,995 0 0 250,000 104,267 104,267 250,000 520,162 520,162 556,573
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 248 1,172 76,172 323 1,247 76,247 398 1,322 76,322
2 3,014 1,273 2,323 77,323 1,496 2,546 77,546 1,728 2,778 77,778
3 4,634 2,963 3,452 78,452 3,409 3,899 78,899 3,893 4,383 79,383
4 6,336 4,315 4,560 79,560 5,063 5,308 80,308 5,905 6,150 81,150
5 8,123 5,646 5,646 80,646 6,773 6,773 81,773 8,095 8,095 83,095
6 9,999 6,710 6,710 81,710 8,299 8,299 83,299 10,236 10,236 85,236
7 11,969 7,752 7,752 82,752 9,885 9,885 84,885 12,594 12,594 87,594
8 14,037 8,772 8,772 83,772 11,535 11,535 86,535 15,189 15,189 90,189
9 16,209 9,769 9,769 84,769 13,250 13,250 88,250 18,045 18,045 93,045
10 18,490 10,743 10,743 85,743 15,032 15,032 90,032 21,187 21,187 96,187
11 20,884 11,694 11,694 86,694 16,884 16,884 91,884 24,646 24,646 99,646
12 23,398 12,622 12,622 87,622 18,807 18,807 93,807 28,451 28,451 103,451
13 26,038 13,527 13,527 88,527 20,806 20,806 95,806 32,640 32,640 107,640
14 28,810 14,407 14,407 89,407 22,880 22,880 97,880 37,249 37,249 112,249
15 31,720 15,265 15,265 90,265 25,035 25,035 100,035 42,323 42,323 117,323
16 34,777 16,098 16,098 91,098 27,272 27,272 102,272 47,906 47,906 122,906
17 37,985 16,906 16,906 91,906 29,593 29,593 104,593 54,051 54,051 129,051
18 41,355 17,690 17,690 92,690 32,002 32,002 107,002 60,814 60,814 135,814
19 44,892 18,448 18,448 93,448 34,501 34,501 109,501 68,258 68,258 143,258
20 48,607 19,181 19,181 94,181 37,094 37,094 112,094 76,452 76,452 151,452
Age 60 97,665 24,740 24,740 99,740 68,599 68,599 143,599 220,552 220,552 295,552
Age 65 132,771 25,818 25,818 100,818 88,389 88,389 163,389 364,042 364,042 444,131
Age 70 177,576 25,101 25,101 100,101 110,805 110,805 185,805 594,888 594,888 690,070
Age 75 234,759 21,701 21,701 96,701 135,237 135,237 210,237 966,859 966,859 1,041,859
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 198 1,123 76,123 272 1,196 76,196 345 1,269 76,269
2 3,014 1,173 2,223 77,223 1,390 2,440 77,440 1,616 2,666 77,666
3 4,634 2,813 3,302 78,302 3,245 3,735 78,735 3,714 4,203 79,203
4 6,336 4,115 4,360 79,360 4,837 5,082 80,082 5,651 5,895 80,895
5 8,123 5,393 5,393 80,393 6,480 6,480 81,480 7,754 7,754 82,754
6 9,999 6,403 6,403 81,403 7,932 7,932 82,932 9,799 9,799 84,799
7 11,969 7,389 7,389 82,389 9,440 9,440 84,440 12,047 12,047 87,047
8 14,037 8,350 8,350 83,350 11,004 11,004 86,004 14,516 14,516 89,516
9 16,209 9,285 9,285 84,285 12,624 12,624 87,624 17,229 17,229 92,229
10 18,490 10,193 10,193 85,193 14,303 14,303 89,303 20,209 20,209 95,209
11 20,884 11,074 11,074 86,074 16,041 16,041 91,041 23,482 23,482 98,482
12 23,398 11,926 11,926 86,926 17,839 17,839 92,839 27,076 27,076 102,076
13 26,038 12,751 12,751 87,751 19,701 19,701 94,701 31,025 31,025 106,025
14 28,810 13,545 13,545 88,545 21,626 21,626 96,626 35,363 35,363 110,363
15 31,720 14,311 14,311 89,311 23,617 23,617 98,617 40,129 40,129 115,129
16 34,777 15,044 15,044 90,044 25,673 25,673 100,673 45,363 45,363 120,363
17 37,985 15,747 15,747 90,747 27,798 27,798 102,798 51,115 51,115 126,115
18 41,355 16,416 16,416 91,416 29,992 29,992 104,992 57,434 57,434 132,434
19 44,892 17,051 17,051 92,051 32,255 32,255 107,255 64,377 64,377 139,377
20 48,607 17,651 17,651 92,651 34,590 34,590 109,590 72,006 72,006 147,006
Age 60 97,665 20,974 20,974 95,974 61,577 61,577 136,577 204,515 204,515 279,515
Age 65 132,771 19,860 19,860 94,860 76,860 76,860 151,860 334,640 334,640 409,640
Age 70 177,576 15,342 15,342 90,342 91,650 91,650 166,650 541,536 541,536 628,181
Age 75 234,759 5,398 5,398 80,398 103,195 103,195 178,195 870,477 870,477 945,477
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 7,346 11,628 250,000 8,070 12,351 250,000 8,794 13,076 250,000
2 28,327 17,576 23,042 250,000 19,754 25,220 250,000 22,019 27,485 250,000
3 43,561 32,116 34,247 250,000 36,497 38,629 250,000 41,238 43,369 250,000
4 59,557 44,179 45,245 250,000 51,537 52,602 250,000 59,818 60,884 250,000
5 76,353 56,041 56,041 250,000 67,169 67,169 250,000 80,204 80,204 250,000
6 93,989 66,640 66,640 250,000 82,359 82,359 250,000 101,501 101,501 272,022
7 112,506 77,041 77,041 250,000 98,195 98,195 255,307 124,864 124,864 324,645
8 131,950 87,252 87,252 250,000 114,621 114,621 288,844 150,490 150,490 379,235
9 152,365 97,277 97,277 250,000 131,653 131,653 321,233 178,596 178,596 435,775
10 173,801 107,096 107,096 253,817 149,305 149,305 353,853 209,410 209,410 496,302
11 196,309 116,680 116,680 268,363 167,595 167,595 385,469 243,186 243,186 559,327
12 219,943 126,011 126,011 281,005 186,513 186,513 415,924 280,156 280,156 624,748
13 244,758 135,094 135,094 291,802 206,073 206,073 445,119 320,613 320,613 692,524
14 270,814 143,930 143,930 302,254 226,295 226,295 475,219 364,877 364,877 766,242
15 298,173 152,521 152,521 311,144 247,187 247,187 504,262 413,287 413,287 843,105
16 326,899 160,858 160,858 320,107 268,748 268,748 534,808 466,183 466,183 927,704
17 357,062 168,975 168,975 326,123 291,046 291,046 561,719 524,067 524,067 1,011,449
18 388,733 176,865 176,865 332,505 314,080 314,080 590,470 587,356 587,356 1,104,228
19 421,988 184,527 184,527 337,684 337,864 337,864 618,292 656,534 656,534 1,201,458
20 456,905 191,965 191,965 341,698 362,418 362,418 645,105 732,138 732,138 1,303,205
Age 60 298,173 152,521 152,521 311,144 247,187 247,187 504,262 413,287 413,287 843,105
Age 65 456,905 191,965 191,965 341,698 362,418 362,418 645,105 732,138 732,138 1,303,205
Age 70 659,493 225,487 225,487 356,269 496,405 496,405 784,319 1,226,225 1,226,225 1,937,436
Age 75 918,052 253,296 253,296 359,680 650,333 650,333 923,473 1,985,022 1,985,022 2,818,731
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% CERTIFICATE CERTIFICATE -------------------------------
CERTIFICATE PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER CERTIFICATE DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 6,978 11,259 250,000 7,690 11,972 250,000 8,403 12,684 250,000
2 28,327 16,835 22,301 250,000 18,969 24,435 250,000 21,189 26,655 250,000
3 43,561 30,999 33,130 250,000 35,283 37,414 250,000 39,921 42,052 250,000
4 59,557 42,681 43,747 250,000 49,868 50,933 250,000 57,963 59,028 250,000
5 76,353 54,158 54,158 250,000 65,023 65,023 250,000 77,761 77,761 250,000
6 93,989 64,368 64,368 250,000 79,715 79,715 250,000 98,431 98,431 263,794
7 112,506 74,374 74,374 250,000 95,037 95,037 250,000 121,012 121,012 314,631
8 131,950 84,179 84,179 250,000 110,882 110,882 279,424 145,657 145,657 367,056
9 152,365 93,783 93,783 250,000 127,218 127,218 310,411 172,539 172,539 420,995
10 173,801 103,187 103,187 250,000 144,035 144,035 341,362 201,827 201,827 478,329
11 196,309 112,309 112,309 258,310 161,338 161,338 371,078 233,722 233,722 537,561
12 219,943 121,137 121,137 270,136 179,134 179,134 399,469 268,443 268,443 598,628
13 244,758 129,679 129,679 280,106 197,430 197,430 426,449 306,229 306,229 661,456
14 270,814 137,929 137,929 289,651 216,220 216,220 454,062 347,318 347,318 729,368
15 298,173 145,894 145,894 297,624 235,510 235,510 480,441 391,986 391,986 799,651
16 326,899 153,554 153,554 305,572 255,265 255,265 507,977 440,455 440,455 876,505
17 357,062 160,930 160,930 310,594 275,513 275,513 531,741 493,079 493,079 951,642
18 388,733 167,998 167,998 315,835 296,206 296,206 556,867 550,097 550,097 1,034,182
19 421,988 174,750 174,750 319,792 317,317 317,317 580,689 611,802 611,802 1,119,597
20 456,905 181,188 181,188 322,515 338,831 338,831 603,119 678,527 678,527 1,207,777
Age 60 298,173 145,894 145,894 297,624 235,510 235,510 480,441 391,986 391,986 799,651
Age 65 456,905 181,188 181,188 322,515 338,831 338,831 603,119 678,527 678,527 1,207,777
Age 70 659,493 208,608 208,608 329,601 451,563 451,563 713,469 1,099,766 1,099,766 1,737,630
Age 75 918,052 228,308 228,308 324,197 570,587 570,587 810,233 1,705,375 1,705,375 2,421,632
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A CERTIFICATE WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE AVERAGES
FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
CERTIFICATE VALUE TRANSFERRED TO THE GENERAL ACCOUNT. NO REPRESENTATIONS CAN BE
MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY
ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-8
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge may be calculated upon issuance of the Certificate
and upon each increase in the Face Amount. The maximum surrender charge
calculated upon issuance of the Certificate is equal to $8.50 per thousand
dollars of the initial Face Amount plus up to 50% (less any premium expense
charge not associated with state and local premium taxes) of the Guideline
Annual Premium, depending on the group to which the Policy is issued. The
maximum surrender charge for an increase in the Face Amount is $8.50 per
thousand dollars of increase, plus up to 50% (less any premium expense charge
not associated with state and local premium taxes) of the Guideline Annual
Premium for the increase. The calculation may be summarized in the following
formula:
<TABLE>
<S> <C>
Maximum Surrender Charge = (8.5 X Face Amount) + (up to 50% X Guideline Annual Premium)
-----------
1000
</TABLE>
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Certificate and upon
each increase in the Face Amount are shown in the following table. During the
first two Certificate years following issue or an increase in Face Amount, the
actual surrender charge may be less than the maximum. See CHARGES AND DEDUCTIONS
- -- "Surrender Charge."
The maximum surrender charge remains level for up to the first 24 Certificate
months, reduced uniformly for the balance of the surrender charge period, and is
zero thereafter. The actual surrender charge imposed may be less than the
maximum.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Underwriting Class as indicated in the following table.
D-1
<PAGE>
MAXIMUM SURRENDER CHARGE PER $1000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at Age at
issue or Unisex Unisex Unisex issue or Unisex Unisex Unisex
increase Nonsmoker Smoker Uni-smoker Increase Nonsmoker Smoker Uni-smoker
- --------- ------------- ----------- ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
0 14.89 14.37 41 27.74 32.73 29.39
1 14.84 14.31 42 28.55 33.79 30.27
2 15.00 14.44 43 29.41 34.91 31.19
3 15.17 14.58 44 30.31 36.08 32.17
4 15.35 14.73 45 31.26 37.31 33.19
5 15.53 14.88 46 32.27 38.60 34.27
6 15.73 15.05 47 33.33 39.95 35.40
7 15.94 15.23 48 34.46 41.38 36.59
8 16.16 15.41 49 35.64 42.89 37.86
9 16.39 15.61 50 36.90 44.48 39.19
10 16.64 15.82 51 38.24 46.17 40.60
11 16.91 16.05 52 39.66 47.95 42.10
12 17.18 16.28 53 41.17 49.84 43.68
13 17.47 16.52 54 42.76 51.82 45.36
14 17.77 16.77 55 44.46 53.91 47.12
15 18.08 17.02 56 46.25 56.11 48.98
16 18.38 17.28 57 48.16 56.87 50.95
17 18.67 17.54 58 50.18 56.76 53.03
18 17.15 18.98 17.80 59 52.34 56.65 55.24
19 17.40 19.29 18.07 60 54.64 56.54 56.71
20 17.65 19.62 18.35 61 56.54 56.44 56.59
21 17.92 19.95 18.64 62 56.41 56.34 56.47
22 18.20 20.31 18.95 63 56.29 56.26 56.36
23 18.49 20.68 19.27 64 56.16 56.18 56.25
24 18.80 21.08 19.61 65 56.03 56.10 56.13
25 19.13 21.49 19.97 66 55.90 56.01 56.00
26 19.48 21.94 20.35 67 55.74 55.90 55.85
27 19.85 22.42 20.75 68 55.58 55.76 55.70
28 20.24 22.92 21.18 69 55.41 55.63 55.53
29 20.65 23.45 21.63 70 55.27 55.49 55.37
30 21.08 24.02 22.11 71 55.12 55.38 55.22
31 21.54 24.62 22.61 72 54.96 55.29 55.10
32 22.03 25.25 23.15 73 54.85 55.23 54.99
33 22.54 25.92 23.71 74 54.75 55.19 54.89
34 23.03 26.62 24.30 75 54.64 55.16 54.80
35 23.64 27.36 24.92 76 54.52 55.10 54.69
36 24.24 28.15 25.57 77 54.36 55.01 54.53
37 24.87 28.97 26.26 78 54.18 54.86 54.35
38 25.53 29.84 26.99 79 53.97 54.68 54.14
39 26.23 30.76 27.75 80 53.75 54.49 53.91
40 26.97 31.72 28.55
</TABLE>
D-2
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a unisex, Age 35 non-smoker
purchases a $100,000 Certificate. In this example the Guideline Annual Premium
("GAP") equals $1,032.25. The maximum surrender charge is calculated as follows:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $516.13
(50% X GAP)
-----------------------
$1,366.13
Maximum surrender charge per Table (23.64 X 100) $2,364.00
During the first two Certificate years after the Date of Issue, the actual
surrender charge is the smaller of the maximum surrender charge and the
following sum:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(not to exceed 30% of premiums received,
up to one GAP, plus 9% of premiums
received in excess of one GAP)
--------------------
Sum of (1) and (2)
The maximum surrender charge is $1,366.13. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
EXAMPLE 1:
Assume the Certificate Owner surrenders the Certificate in the 10th Certificate
month, having paid total premiums of $900. The actual surrender charge would be
$1,120.
EXAMPLE 2:
Assume the Certificate Owner surrenders the Certificate in the 120th Certificate
month. Also assume that after the 24th Certificate month, the maximum surrender
charge decreases by 1/156 per month, thereby reaching zero at the end of the
15th Certificate year. In this example, the maximum surrender charge would be
$525.43.
D-3
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997 1998 1997
----------------------------------------------- ------- ------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Premiums................................... $ -- $ 7.0 $ 0.4 $ 23.3
Universal life and investment product
policy fees.............................. 67.7 55.0 195.7 156.4
Net investment income...................... 38.7 41.5 113.5 125.8
Net realized investment gains (losses)..... (2.7) 0.2 19.5 (2.9)
Other income............................... 0.4 0.2 0.3 0.6
------- ------- --------- ---------
Total revenues......................... 104.1 103.9 329.4 303.2
------- ------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 32.7 48.9 114.5 147.2
Policy acquisition expenses................ 13.3 11.3 45.0 38.0
Sales practice litigation expense.......... 21.0 -- 21.0 --
Loss from cession of disability income
business................................. -- -- -- 53.9
Other operating expenses................... 22.6 24.0 72.5 71.6
------- ------- --------- ---------
Total benefits, losses and expenses.... 89.6 84.2 253.0 310.7
------- ------- --------- ---------
Income (loss) before federal income
taxes.................................... 14.5 19.7 76.4 (7.5)
------- ------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 1.5 14.6 19.0 5.9
Deferred................................... 1.7 (7.6) 5.9 (8.1)
------- ------- --------- ---------
Total federal income tax expense
(benefit)............................ 3.2 7.0 24.9 (2.2)
------- ------- --------- ---------
Net income (loss).............................. 11.3 12.7 51.5 (5.3)
OTHER COMPREHENSIVE (LOSS) INCOME
Net (depreciation) appreciation on available
for sale securities........................... (9.8) 13.1 (18.9) 21.7
Benefit (provision) for deferred federal income
taxes......................................... 3.4 (4.6) 6.6 (7.6)
------- ------- --------- ---------
Other comprehensive (loss) income...... (6.4) 8.5 (12.3) 14.1
------- ------- --------- ---------
Comprehensive income (loss) $ 4.9 $ 21.2 $ 39.2 $ 8.8
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 1998 1997
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period..... $ 2.5 $ 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 386.9 346.3
Issuance of common stock................... 8.0 --
--------- ---------
Balance at end of period................... 394.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4
Net income (loss).......................... 51.5 (5.3)
--------- ---------
Balance at end of period................... 264.6 171.1
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 38.5 20.5
Net (depreciation) appreciation on
available for sale securities............ (18.9) 21.7
Benefit (provision) for deferred federal
income taxes............................. 6.6 (7.6)
--------- ---------
Other comprehensive (loss) income...... (12.3) 14.1
--------- ---------
Balance at end of period................... 26.2 34.6
--------- ---------
Total shareholder's equity............. $ 688.2 $ 554.5
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER DECEMBER
30, 31,
(IN MILLIONS) 1998 1997
----------------------------------------------- ----------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized
cost of $1,266.5 and $1,340.5)............ $ 1,334.2 $ 1,402.5
Equity securities at fair value (cost of
$37.5 and $34.4).......................... 34.5 54.0
Mortgage loans............................. 227.1 228.2
Real estate................................ 3.9 12.0
Policy loans............................... 151.0 140.1
Other long term investments................ 19.5 20.3
----------- ----------
Total investments...................... 1,770.2 1,857.1
----------- ----------
Cash and cash equivalents.................... 137.1 31.1
Accrued investment income.................... 31.3 34.2
Deferred policy acquisition costs............ 903.3 765.3
Reinsurance receivables:
Future policy benefits..................... 265.4 242.5
Outstanding claims, losses and loss
adjustment expenses....................... 12.7 5.5
Unearned premiums.......................... 2.8 1.7
Other...................................... 31.5 1.4
----------- ----------
Total reinsurance receivables.......... 312.4 251.1
----------- ----------
Other assets................................. 36.0 10.7
Separate account assets 9,072.1 7,567.3
----------- ----------
Total assets........................... $ 12,262.4 $ 10,516.8
----------- ----------
----------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits..................... $ 2,241.0 $ 2,097.3
Outstanding claims, losses and loss
adjustment expenses....................... 18.8 18.5
Unearned premiums.......................... 2.8 1.8
Contractholder deposit funds and other
policy liabilities........................ 41.6 32.5
----------- ----------
Total policy liabilities and
accruals............................... 2,304.2 2,150.1
----------- ----------
Expenses and taxes payable................... 84.8 77.6
Reinsurance premiums payable................. 36.4 4.9
Short term debt.............................. -- --
Deferred federal income taxes................ 75.2 75.9
Separate account liabilities................. 9,073.6 7,567.3
----------- ----------
Total liabilities...................... 11,574.2 9,875.8
----------- ----------
Commitments and contingencies (Note 5)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,522 shares issued &
outstanding................................ 2.5 2.5
Additional paid in capital................... 394.9 386.9
Accumulated other comprehensive income....... 26.2 38.5
Retained earnings............................ 264.6 213.1
----------- ----------
Total shareholder's equity............. 688.2 641.0
----------- ----------
Total liabilities and shareholder's
equity................................. $ 12,262.4 $ 10,516.8
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(IN MILLIONS) 1998 1997
----------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 51.5 $ (5.3)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Net realized (gains) losses............ (19.5) 2.9
Net amortization and depreciation...... (5.9) 0.2
Sales practice litigation expense...... 21.0
Deferred federal income taxes.......... 5.9 (8.1)
Change in deferred acquisition costs... (140.1) (58.7)
Change in premiums and notes
receivable, net of reinsurance....... 31.3 --
Change in accrued investment income.... 2.9 (2.9)
Change in policy liabilities and
accruals, net........................ 154.2 (20.8)
Change in reinsurance receivable....... (61.3) (2.6)
Change in expenses and taxes payable... (3.5) (29.6)
Separate account activity, net......... 1.6 0.4
Other, net............................. (25.4) 0.4
----------- -----------
Net cash provided by (used in)
operating activities............. 12.7 (59.1)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities...... 145.9 602.2
Proceeds from disposals of equity
securities............................... 42.1 2.1
Proceeds from disposals of other
investments.............................. 12.5 19.4
Proceeds from mortgages matured or
collected................................ 55.3 40.5
Purchase of available-for-sale fixed
maturities............................... (77.6) (562.6)
Purchase of equity securities.............. (29.4) (1.9)
Purchase of other investments.............. (62.7) (41.1)
Other, net................................. (.7) --
----------- -----------
Net cash provided by investing
activities....................... 85.4 58.6
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common
stock.................................... 8.0 --
----------- -----------
Net cash provided by financing
activities....................... 8.0 --
----------- -----------
Net change in cash and cash equivalents........ 106.0 (0.5)
Cash and cash equivalents, beginning of
period........................................ 31.1 18.8
----------- -----------
Cash and cash equivalents, end of period....... $ 137.1 $ 18.3
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
UF-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC"). The accompanying
unaudited consolidated financial statements of AFLIAC have been prepared in
accordance with generally accepted accounting principles for stock life
insurance companies for interim financial information.
The interim consolidated financial statements of AFLIAC include the accounts of
Somerset Square, Inc., a wholly owned non-insurance company. Somerset Square,
Inc. was transferred from SMAFCO effective November 30, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments, consisting of only normal
and recurring adjustments, necessary for a fair presentation of the financial
position and results of operations. Certain reclassifications have been made to
the 1997 consolidated statements of income in order to conform to the 1998
presentation. The results of operations for the third quarter and nine months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year. These financial statements should be read in
conjunction with the Company's 1997 Annual Audited Financial Statements.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of general-
purpose financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted Statement No. 130 for the first quarter of 1998, resulting primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP No. 97-3"). SoP No. 97-3
provides guidance on when a liability should be recognized for guaranty fund and
other assessments and how to measure the liability. This statement allows for
the discounting of the liability if the amount and timing of the cash payments
are fixed and determinable. In addition, it provides criteria for when an asset
may be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use"
UF-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
("SoP No. 98-1"). SoP No. 98-1 requires that certain costs incurred in
developing internal-use computer software be capitalized and provides guidance
for determining whether computer software is to be considered for internal use.
This statement is effective for fiscal years beginning after December 15, 1998.
In the second quarter, the Company adopted SoP No. 98-1 effective January 1,
1998. The adoption of SoP No. 98-1 did not have a material effect on the results
of operations or financial position for the three months ended March 31, 1998.
Through the nine months ended September 30, 1998, the adoption of this SoP
resulted in an increase to pre-tax income of approximately $6.0 million.
3. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. This agreement did not have a
material effect on the Company's results of operations or financial position.
4. FEDERAL INCOME TAXES
Federal income tax expense for the periods ended September 30, 1998 and 1997,
has been computed using estimated effective tax rates. These rates are revised,
if necessary, at the end of each successive interim period to reflect the
current estimates of the annual effective tax rates.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 refiled the 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, AFC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation, of which $21.0 million was apportioned to AFLIAC. 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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
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.
UF-6
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity 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 Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- ------- -------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
------- -------
Total revenues......................... 403.5 377.9
------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
------- -------
Total benefits, losses and expenses.... 345.8 329.1
------- -------
Income before federal income taxes............. 57.7 48.8
------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
------- -------
Total federal income tax expense....... 21.0 17.1
------- -------
Net income..................................... $ 36.7 $ 31.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT 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
$1,340.5 and $1,660.2)............................ $ 1,402.5 $ 1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ---------
Total investments............................... 1,857.1 2,126.8
---------- ---------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ---------
Total assets.................................... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,097.3 $ 2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ---------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ---------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ---------
Total liabilities............................... 9,875.8 6,884.0
---------- ---------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ---------
Total shareholder's equity...................... 641.0 545.7
---------- ---------
Total liabilities and shareholder's equity...... $ 10,516.8 $ 7,429.7
---------- ---------
---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT 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
----------------------------------------------- ------- -------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
------- -------
Balance at end of period................... 2.5 2.5
------- -------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
------- -------
Balance at end of period................... 386.9 346.3
------- -------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
------- -------
Balance at end of period................... 213.1 176.4
------- -------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
------- -------
Balance at end of period................... 38.5 20.5
------- -------
Total shareholder's equity............. $ 641.0 $ 545.7
------- -------
------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- -------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8)
Payment related to cession of
disability income business........ (207.0) --
Change in deferred acquisition
costs............................. (181.3) (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2)
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4) (39.9)
Change in reinsurance receivable.... 22.1 (1.5)
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5) (0.2)
-------- --------
Net used in operating
activities.................... (343.3) (35.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7) (795.8)
Purchase of equity securities........... (3.2) (13.2)
Purchase of other investments........... (79.4) (36.2)
Other investing activities, net......... -- (2.0)
-------- --------
Net cash provided by investing
activities........................ 336.4 15.1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
-------- --------
Net cash provided by financing
activities........................ 19.2 22.0
-------- --------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
-------- --------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
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. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. 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.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
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
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
C. 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, and investment and loan
commitments. 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.
D. 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.
E. 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.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized 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 product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. 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.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. 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. 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. Individual health benefit liabilities for
active lives are estimated using the net level premium method, and assumptions
as to future morbidity, withdrawals and interest which provide a margin for
adverse deviation. Benefit liabilities for disabled lives are estimated using
the present value of benefits method and experience assumptions as to claim
terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual 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 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.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual 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 and group variable 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 benefits 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.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and 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. Allmerica P&C 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, Allmerica P&C 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.
J. 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.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT TRANSACTIONS
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.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
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.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of 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....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these 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 $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
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..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</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............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ----- ------
9.4 8.6 18.0
---------- ----- ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ----- ------
(7.7) 4.4 (3.3)
---------- ----- ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 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 $15.7 million were written down to the estimated fair value
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
less cost to sell of $12.0 million, and a net realized investment loss of $3.7
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, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. 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........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 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.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $ 1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- --- --- -----
Total................................................... $ 11.2 $ 4.8 $ 6.6 $ 9.4
----- --- --- -----
----- --- --- -----
1996
Mortgage loans.............................................. $ 12.5 $ 4.5 $ 7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- --- --- -----
Total................................................... $ 14.6 $ 4.5 $ 7.9 $ 11.2
----- --- --- -----
----- --- --- -----
</TABLE>
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 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 $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- ------
Net investment income....................................... $164.2 $171.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities 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
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- ------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- ------
---------- ------
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
F-15
<PAGE>
NOTES TO 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................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- --------- --------- ---------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- --------- --------- ---------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
7. 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 statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $ 13.9 $ 26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $ 21.0 $ 17.1
----- -----
----- -----
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
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 life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. 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.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
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
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
aforementioned threshold, from a source other than statutory earned surplus
would also require the prior approval of the Delaware Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- ------
Net premiums................................................ $ 22.8 $ 32.7
---------- ------
---------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- ------
---------- ------
</TABLE>
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- ------
Balance at end of year...................................... $765.3 $632.7
---------- ------
---------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. 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
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. 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 Allmerica Financial
Corp. 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
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 the 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.
The Company has been named a defendant in various 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 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.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. 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.
14. STATUTORY FINANCIAL INFORMATION
The Company is 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,
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
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- ------
---------- ------
</TABLE>
15. EVENT 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 refiled the 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, AFC recognized a $31.0
million pre-tax expense during the third quarter of 1998 related to this
litigation, of which $21.0 million was apportioned to AFLIAC. 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.
F-20
<PAGE>
BALANCE SHEET
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $2,266,663 $15,374,014 $ 471,447 $24,213,382 $ 27,641 $ 622,421
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 91 133 -- -- --
---------- ------------ ------------ ------------ ---------- ----------
Total assets.............................. 2,266,663 15,374,105 471,580 24,213,382 27,641 622,421
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 12 -- -- 131 3 --
---------- ------------ ------------ ------------ ---------- ----------
Net assets................................ $2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
---------- ------------ ------------ ------------ ---------- ----------
---------- ------------ ------------ ------------ ---------- ----------
Net asset distribution by category:
Variable life policies.................... $2,266,651 $15,373,834 $ 471,580 $24,213,251 $ 27,638 $ 622,421
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- 271 -- -- -- --
---------- ------------ ------------ ------------ ---------- ----------
$2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
---------- ------------ ------------ ------------ ---------- ----------
Units outstanding........................... 1,283,086 11,359,499 394,674 11,682,115 21,431 395,456
Net asset value per unit.................... $ 1.766562 $ 1.353414 $1.194860 $ 2.072677 $1.289650 $1.573932
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $8,819,867 $ 191,017 $ 483,804 $7,786,135
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 12
------------- ---------- ------------ -------------
Total assets.............................. 8,819,867 191,017 483,804 7,786,147
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 68 1 3 --
------------- ---------- ------------ -------------
Net assets................................ $8,819,799 $ 191,016 $ 483,801 $7,786,147
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
Net asset distribution by category:
Variable life policies.................... $8,819,799 $ 191,016 $ 483,801 $7,786,147
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
------------- ---------- ------------ -------------
$8,819,799 $ 191,016 $ 483,801 $7,786,147
------------- ---------- ------------ -------------
Units outstanding........................... 4,220,377 109,264 294,851 5,536,528
Net asset value per unit.................... $ 2.089813 $1.748206 $1.640835 $ 1.406323
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
BALANCE SHEET
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ 190,605 $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- 56,940 127,409 586,624 48,782 579,716
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 5 -- --
------------ ----------- ------------- ---------- ---------- -------------
Total assets.............................. 190,605 56,940 127,409 586,629 48,782 579,716
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
------------ ----------- ------------- ---------- ---------- -------------
Net assets................................ $ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
------------ ----------- ------------- ---------- ---------- -------------
------------ ----------- ------------- ---------- ---------- -------------
Net asset distribution by category:
Variable life policies.................... $ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- -- -- --
------------ ----------- ------------- ---------- ---------- -------------
$ 190,605 $ 56,940 $ 127,409 $ 586,629 $ 48,782 $ 579,716
------------ ----------- ------------- ---------- ---------- -------------
------------ ----------- ------------- ---------- ---------- -------------
Units outstanding........................... 123,614 41,971 75,014 296,384 37,623 365,683
Net asset value per unit.................... $1.541942 $1.356639 $1.698480 $ 1.979291 $ 1.296617 $1.585297
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL STOCK INTERNATIONAL EQUITY INDUSTRIAL INCOME TOTAL RETURN
---------------------- -------------------- ----------------- ------------
<S> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. 313,080 -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- 4,124,898 -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- 8,260 56,271
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- 7 -- --
---------- ----------- ----------------- ------------
Total assets.............................. 313,080 4,124,905 8,260 56,271
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 1 -- -- --
---------- ----------- ----------------- ------------
Net assets................................ $ 313,079 $4,124,905 $ 8,260 $ 56,271
---------- ----------- ----------------- ------------
---------- ----------- ----------------- ------------
Net asset distribution by category:
Variable life policies.................... $ 313,079 $4,124,905 $ 8,260 $ 56,271
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... -- -- -- --
---------- ----------- ----------------- ------------
$ 313,079 $4,124,905 $ 8,260 $ 56,271
---------- ----------- ----------------- ------------
---------- ----------- ----------------- ------------
Units outstanding........................... 277,770 3,667,589 5,811 42,974
Net asset value per unit.................... $1.127115 $ 1.124691 $1.421423 $1.309412
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. --
Investment in shares of T. Rowe Price
International Series, Inc................. --
Investment in shares of Delaware Group
Premium Fund, Inc......................... --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... 10,044,137
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 58
--------------
Total assets.............................. 10,044,195
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... --
--------------
Net assets................................ $10,044,195
--------------
--------------
Net asset distribution by category:
Variable life policies.................... $10,044,195
Value of investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)....................... --
--------------
$10,044,195
--------------
--------------
Units outstanding........................... 9,366,395
Net asset value per unit.................... $ 1.072365
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
OPS
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
---------- ------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 17,907 $659,374 $216,882 $224,452 $ 604 $ --
EXPENSES:
Mortality and expense risk fees........... 9,160 67,682 20,985 85,929 70 2,921
---------- ------------ ------------ ------------ ---------- -----------
Net investment income..................... 8,747 591,692 195,897 138,523 534 (2,921)
---------- ------------ ------------ ------------ ---------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 21,129 -- -- 40,412 -- --
Net realized gain from sales of
investments............................. (3,863) 13,484 -- 270,900 857 9,933
---------- ------------ ------------ ------------ ---------- -----------
Net realized gain....................... 17,266 13,484 -- 311,312 857 9,933
Net unrealized gain (loss)................ (145,250) 360,476 -- 183,657 507 (119,618)
---------- ------------ ------------ ------------ ---------- -----------
Net realized and unrealized gain
(loss)................................ (127,984) 373,960 -- 494,969 1,364 (109,685)
---------- ------------ ------------ ------------ ---------- -----------
Net increase in net assets from
operations............................ $(119,237) $965,652 $195,897 $633,492 $1,898 $(112,606)
---------- ------------ ------------ ------------ ---------- -----------
---------- ------------ ------------ ------------ ---------- -----------
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,781 $ 1,945 $ 56 $ 65,149
EXPENSES:
Mortality and expense risk fees........... 43,360 1,234 1,864 40,567
------------- ------------ ------------ -------------
Net investment income..................... (41,579) 711 (1,808) 24,582
------------- ------------ ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 93,491 922 1,651 --
Net realized gain from sales of
investments............................. 463,603 3,152 (1,221) 60,619
------------- ------------ ------------ -------------
Net realized gain....................... 557,094 4,074 430 60,619
Net unrealized gain (loss)................ 276,190 (12,295) (47,658) (350,436)
------------- ------------ ------------ -------------
Net realized and unrealized gain
(loss)................................ 833,284 (8,221) (47,228) (289,817)
------------- ------------ ------------ -------------
Net increase in net assets from
operations............................ $791,705 $ (7,510) $(49,036) $(265,235)
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
OPS
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 3,501 $ 898 $ 1,819 $ 1,056 $ 11,971
EXPENSES:
Mortality and expense risk fees........... 628 260 348 1,583 256 1,997
------------ ----------- ------------- -------- ---------- -------------
Net investment income..................... (628) 3,241 550 236 800 9,974
------------ ----------- ------------- -------- ---------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 2,225 3,196 47,583 3,112 35,913
Net realized gain from sales of
investments............................. (916) (516) 1,934 37,699 224 4,871
------------ ----------- ------------- -------- ---------- -------------
Net realized gain....................... (916) 1,709 5,130 85,282 3,336 40,784
Net unrealized gain (loss)................ (29,462) (11,354) (15,629) (55,045) (8,127) (57,674)
------------ ----------- ------------- -------- ---------- -------------
Net realized and unrealized gain
(loss)................................ (30,378) (9,645) (10,499) 30,237 (4,791) (16,890)
------------ ----------- ------------- -------- ---------- -------------
Net increase in net assets from
operations............................ $(31,006) $(6,404) $ (9,949) $30,473 $(3,991) $ (6,916)
------------ ----------- ------------- -------- ---------- -------------
------------ ----------- ------------- -------- ---------- -------------
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL INTERNATIONAL INDUSTRIAL TOTAL
STOCK EQUITY INCOME RETURN
------------------- ---------------------------- ----------------- ------------
<S> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 11,680 $ -- $ --
EXPENSES:
Mortality and expense risk fees........... 896 11,394 30 200
-------- ---------- --- -----
Net investment income..................... (896) 286 (30) (200)
-------- ---------- --- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- -- -- --
Net realized gain from sales of
investments............................. 323 9,242 324 525
-------- ---------- --- -----
Net realized gain....................... 323 9,242 324 525
Net unrealized gain (loss)................ (27,510) (333,972) (247) (739)
-------- ---------- --- -----
Net realized and unrealized gain
(loss)................................ (27,187) (324,730) 77 (214)
-------- ---------- --- -----
Net increase in net assets from
operations............................ $(28,083) $(324,444) $ 47 $(414)
-------- ---------- --- -----
-------- ---------- --- -----
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------------
FOR THE PERIOD
2/17/98** TO 9/30/98
--------------------
INVESTMENT INCOME:
Dividends................................. $ 5,468
EXPENSES:
Mortality and expense risk fees........... 22,795
--------
Net investment income..................... (17,327)
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 29,711
Net realized gain from sales of
investments............................. 3,421
--------
Net realized gain....................... 33,132
Net unrealized gain (loss)................ 452,436
--------
Net realized and unrealized gain
(loss)................................ 485,568
--------
Net increase in net assets from
operations............................ $468,241
--------
--------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
CNA
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
----------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ 8,747 $ 591,692 $ 195,897 $ 138,523 $ 534 $ (2,921)
Net realized gain on investments........ 17,266 13,484 -- 311,312 857 9,933
Net unrealized gain (loss) on
investments........................... (145,250) 360,476 -- 183,657 507 (119,618)
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets from
operations............................ (119,237) 965,652 195,897 633,492 1,898 (112,606)
----------- ------------ ------------ ------------ ---------- ----------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 676,055 2,980,199 1,605,139 2,382,378 18,129 421,346
Terminations............................ (47,687) (53,707) (47,898) (11,947) (81) (55,014)
Insurance and other charges............. (6,039) (345,058) (684,136) (710,090) (156) (13,531)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (11,755) 1,982,655 (29,097,886) 13,375,518 (31,762) 143,171
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- (251) -- -- -- --
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets from capital
transactions.............................. 610,574 4,563,838 (28,224,781) 15,035,859 (13,870) 495,972
----------- ------------ ------------ ------------ ---------- ----------
Net increase in net assets.............. 491,337 5,529,490 (28,028,884) 15,669,351 (11,972) 383,366
NET ASSETS:
Beginning of period..................... 1,775,314 9,844,615 28,500,464 8,543,900 39,610 239,055
----------- ------------ ------------ ------------ ---------- ----------
End of period........................... $ 2,266,651 $15,374,105 $ 471,580 $24,213,251 $ 27,638 $ 622,421
----------- ------------ ------------ ------------ ---------- ----------
----------- ------------ ------------ ------------ ---------- ----------
<CAPTION>
SELECT SELECT SELECT
GROWTH VALUE INTERNATIONAL
SELECT GROWTH AND INCOME OPPORTUNITY* EQUITY
------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (41,579) $ 711 $ (1,808) $ 24,582
Net realized gain on investments........ 557,094 4,074 430 60,619
Net unrealized gain (loss) on
investments........................... 276,190 (12,295) (47,658) (350,436)
------------- ---------- ------------ -------------
Net increase in net assets from
operations............................ 791,705 (7,510) (49,036) (265,235)
------------- ---------- ------------ -------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 2,083,798 149,639 232,167 1,902,015
Terminations............................ (38,487) (44,998) (31,514) (52,253)
Insurance and other charges............. (214,285) (6,310) (9,024) (199,317)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. (785,039) (71,967) 106,174 764,111
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- --
------------- ---------- ------------ -------------
Net increase in net assets from capital
transactions.............................. 1,045,987 26,364 297,803 2,414,556
------------- ---------- ------------ -------------
Net increase in net assets.............. 1,837,692 18,854 248,767 2,149,321
NET ASSETS:
Beginning of period..................... 6,982,107 172,162 235,034 5,636,826
------------- ---------- ------------ -------------
End of period........................... $8,819,799 $191,016 $483,801 $7,786,147
------------- ---------- ------------ -------------
------------- ---------- ------------ -------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
SELECT FIDELITY FIDELITY FIDELITY FIDELITY FIDELITY
CAPITAL VIP VIP VIP VIP VIP II
APPRECIATION HIGH INCOME EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------ ----------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (628) $ 3,241 $ 550 $ 236 $ 800 $ 9,974
Net realized gain on investments........ (916) 1,709 5,130 85,282 3,336 40,784
Net unrealized gain (loss) on
investments........................... (29,462) (11,354) (15,629) (55,045) (8,127 ) (57,674)
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets from
operations............................ (31,006) (6,404) (9,949) 30,473 (3,991 ) (6,916)
------------ ----------- ------------- -------- -------- -------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 94,179 31,039 103,604 248,613 28,087 220,392
Terminations............................ (3,230) (4,865) (23,794) (18,463) (2,212 ) (178)
Insurance and other charges............. (3,932) (2,402) (4,092) (5,885) (2,489 ) (439)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 69,209 (3,857) 2,659 (13,668) (21,384 ) (4,582)
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- -- -- --
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets from capital
transactions.......................... 156,226 19,915 78,377 210,597 2,002 215,193
------------ ----------- ------------- -------- -------- -------------
Net increase in net assets.............. 125,220 13,511 68,428 241,070 (1,989 ) 208,277
NET ASSETS:
Beginning of period..................... 65,385 43,429 58,981 345,559 50,771 371,439
------------ ----------- ------------- -------- -------- -------------
End of period........................... $190,605 $ 56,940 $127,409 $586,629 $48,782 $579,716
------------ ----------- ------------- -------- -------- -------------
------------ ----------- ------------- -------- -------- -------------
<CAPTION>
T. ROWE PRICE DGPF INVESCO INVESCO
INTERNATIONAL INTERNATIONAL INDUSTRIAL TOTAL
STOCK EQUITY INCOME RETURN
------------------- -------------------- ----------------- ------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (896) $ 286 $ (30) $ (200)
Net realized gain on investments........ 323 9,242 324 525
Net unrealized gain (loss) on
investments........................... (27,510) (333,972) (247) (739)
-------- ----------- ------- ------------
Net increase in net assets from
operations............................ (28,083) (324,444) 47 (414)
-------- ----------- ------- ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ 99,713 5,973 5,817 7,062
Terminations............................ (1,553) (370) (916) (8)
Insurance and other charges............. (3,575) (146,229) (3,909) (636)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 148,748 4,507,342 10 42
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... -- -- -- --
-------- ----------- ------- ------------
Net increase in net assets from capital
transactions.......................... 243,333 4,366,716 1,002 6,460
-------- ----------- ------- ------------
Net increase in net assets.............. 215,250 4,042,272 1,049 6,046
NET ASSETS:
Beginning of period..................... 97,829 82,633 7,211 50,225
-------- ----------- ------- ------------
End of period........................... $313,079 $4,124,905 $ 8,260 $56,271
-------- ----------- ------- ------------
-------- ----------- ------- ------------
<CAPTION>
MORGAN STANLEY
FIXED INCOME
--------------------
PERIOD FROM
2/17/98** TO 9/30/98
--------------------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income................... $ (17,327)
Net realized gain on investments........ 33,132
Net unrealized gain (loss) on
investments........................... 452,436
--------------------
Net increase in net assets from
operations............................ 468,241
--------------------
FROM CAPITAL TRANSACTIONS:
Net premiums............................ --
Terminations............................ --
Insurance and other charges............. (305,243)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)............................. 9,881,197
Net increase in investments by Allmerica
Financial Life Insurance and Annuity
Company (Sponsor)..................... --
--------------------
Net increase in net assets from capital
transactions.......................... 9,575,954
--------------------
Net increase in net assets.............. 10,044,195
NET ASSETS:
Beginning of period..................... --
--------------------
End of period........................... $10,044,195
--------------------
--------------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company) established on May 1,
1995 for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Group VEL are
clearly identified and distinguished from the other assets and liabilities of
the Company. Group VEL cannot be charged with liabilities arising out of any
other business of the Company.
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty-one
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc., or of The Morgan Stanley
Universal Funds, Inc. (Morgan Stanley) managed by Miller Anderson & Sherrerd,
LLP. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO and
Morgan Stanley (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act. INVESCO is available only to employees
of INVESCO and its affiliates. Morgan Stanley is available only to employees of
Duke Energy Corporation and its affiliates.
Effective January 9, 1998, the investment portfolio of the Trust, which was
formerly known as Small-Mid Cap Value Fund changed its name to Select Value
Opportunity Fund.
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, Fidelity VIP II, T.
Rowe Price, DGPF, INVESCO, or Morgan Stanley. 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, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, or Morgan
Stanley at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return with First Allmerica. The Company anticipates no tax
liability resulting from the operations of Group VEL. Therefore, no provision
for income taxes has been charged against Group VEL.
SA-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the Group VEL Account of Allmerica Financial Life
Insurance and Annuity 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
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth and Income, Select Value Opportunity,
Select International Equity, Select Capital Appreciation, Fidelity VIP High
Income, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas,
Fidelity VIP II Asset Manager, T. Rowe Price International Stock, DGPF
International Equity, INVESCO Industrial Income, INVESCO Total Return, and
Morgan Stanley Fixed Income) constituting the Group VEL Account of Allmerica
Financial Life Insurance and Annuity Company at December 31, 1997, the results
of each of their operations and the changes in each of their net assets for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity 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>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT EQUITY
GROWTH GRADE INCOME MONEY MARKET INDEX GOVERNMENT BOND
----------- ------------ -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $1,775,306 $9,844,560 $28,500,493 $8,543,950 $ 39,610
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... 8 55 -- -- --
----------- ------------ -------------- ----------- ---------------
Total assets.............................. 1,775,314 9,844,615 28,500,493 8,543,950 39,610
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- 29 50 --
----------- ------------ -------------- ----------- ---------------
Net assets................................ $1,775,314 $9,844,615 $28,500,464 $8,543,900 $ 39,610
----------- ------------ -------------- ----------- ---------------
----------- ------------ -------------- ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $1,775,314 $9,844,364 $28,500,464 $8,543,900 $ 39,610
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- 251 -- -- --
----------- ------------ -------------- ----------- ---------------
$1,775,314 $9,844,615 $28,500,464 $8,543,900 $ 39,610
----------- ------------ -------------- ----------- ---------------
----------- ------------ -------------- ----------- ---------------
Units outstanding, December 31, 1997...... 987,111 7,835,199 24,839,712 4,357,081 33,062
Net asset value per unit, December 31,
1997.................................... $ 1.798494 $1.256428 $ 1.147375 $1.960923 $1.197968
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
----------------- -------------
<S> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 239,055 $6,982,157
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- --
----------------- -------------
Total assets.............................. 239,055 6,982,157
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- 50
----------------- -------------
Net assets................................ $ 239,055 $6,982,107
----------------- -------------
----------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 239,055 $6,982,107
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- --
----------------- -------------
$ 239,055 $6,982,107
----------------- -------------
----------------- -------------
Units outstanding, December 31, 1997...... 136,320 3,619,339
Net asset value per unit, December 31,
1997.................................... $1.753627 $1.929111
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SELECT SELECT SELECT
GROWTH AND SELECT VALUE INTERNATIONAL CAPITAL FIDELITY VIP
INCOME OPPORTUNITY* EQUITY APPRECIATION HIGH INCOME
----------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- 43,429
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Total assets.............................. 172,162 235,034 5,636,826 65,385 43,429
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
Net assets................................ $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Net asset distribution by category:
Variable life policies.................... $ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- -- -- --
----------- ------------ ------------ ----------- ---------------
$ 172,162 $ 235,034 $5,636,826 $ 65,385 $ 43,429
----------- ------------ ------------ ----------- ---------------
----------- ------------ ------------ ----------- ---------------
Units outstanding, December 31, 1997...... 96,017 132,435 3,907,238 37,757 29,272
Net asset value per unit, December 31,
1997.................................... $1.793040 $1.774701 $1.442663 $1.731741 $1.483642
<CAPTION>
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH
----------------- -------------
<S> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 58,981 345,559
Investment in shares of T. Rowe Price
International Series, Inc................. -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- --
----------------- -------------
Total assets.............................. 58,981 345,559
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- --
----------------- -------------
Net assets................................ $ 58,981 $ 345,559
----------------- -------------
----------------- -------------
Net asset distribution by category:
Variable life policies.................... $ 58,981 $ 345,559
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- --
----------------- -------------
$ 58,981 $ 345,559
----------------- -------------
----------------- -------------
Units outstanding, December 31, 1997...... 33,578 195,934
Net asset value per unit, December 31,
1997.................................... $1.756503 $1.763675
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE DGPF
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK INTERNATIONAL EQUITY
------------ --------------- ------------------- --------------------
<S> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 50,771 371,439 -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- 97,829 --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- 82,633
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- -- --
------------ --------------- ---------- ----------
Total assets.............................. 50,771 371,439 97,829 82,633
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- -- --
------------ --------------- ---------- ----------
Net assets................................ $ 50,771 $ 371,439 $ 97,829 $ 82,633
------------ --------------- ---------- ----------
------------ --------------- ---------- ----------
Net asset distribution by category:
Variable life policies.................... $ 50,771 $ 371,439 $ 97,829 $ 82,633
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- -- --
------------ --------------- ---------- ----------
$ 50,771 $ 371,439 $ 97,829 $ 82,633
------------ --------------- ---------- ----------
------------ --------------- ---------- ----------
Units outstanding, December 31, 1997...... 37,389 238,988 85,092 70,825
Net asset value per unit, December 31,
1997.................................... $1.357915 $1.554217 $1.149677 $1.166687
<CAPTION>
INVESCO INVESCO MORGAN STANLEY
INDUSTRIAL INCOME TOTAL RETURN FIXED INCOME(a)
----------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc..................... 7,211 50,225 --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity
Company (Sponsor)......................... -- -- --
----------------- ----------------- ---------------
Total assets.............................. 7,211 50,225 --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and
Annuity Company (Sponsor)................. -- -- --
----------------- ----------------- ---------------
Net assets................................ $ 7,211 $ 50,225 $ --
----------------- ----------------- ---------------
----------------- ----------------- ---------------
Net asset distribution by category:
Variable life policies.................... $ 7,211 $ 50,225 $ --
Value of investment by Allmerica Financial
Life Insurance and
Annuity Company (Sponsor)............... -- -- --
----------------- ----------------- ---------------
$ 7,211 $ 50,225 $ --
----------------- ----------------- ---------------
----------------- ----------------- ---------------
Units outstanding, December 31, 1997...... 5,168 38,284 --
Net asset value per unit, December 31,
1997.................................... $1.395217 $1.311904 $1.000000
</TABLE>
(a) For the period ended 12/31/97, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
-------------------- TO --------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
--------- --------- --------- --------- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 19,495 $ 2,650 $ 4 $ 611,287 $14 $11
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 6,270 1,681 -- 61,160 -- --
--------- --------- --- --------- ---- ---
Net investment income
(loss).................. 13,225 969 4 550,127 14 11
--------- --------- --- --------- ---- ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 282,628 51,596 18 -- -- --
Net realized gain (loss)
from sales of
investments............. 22,096 35 -- 7,069 -- --
--------- --------- --- --------- ---- ---
Net realized gain
(loss)................ 304,724 51,631 18 7,069 -- --
Net unrealized gain
(loss).................. (57,127) (33,389) 17 282,868 (6) 11
--------- --------- --- --------- ---- ---
Net realized and
unrealized gain
(loss)................ 247,597 18,242 35 289,937 (6) 11
--------- --------- --- --------- ---- ---
Net increase (decrease)
in net assets from
operations............ $ 260,822 $ 19,211 $39 $ 840,064 $ 8 $22
--------- --------- --- --------- ---- ---
--------- --------- --- --------- ---- ---
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------ 5/1/95** ------------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
--------- ------- -------------- ----------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 168,681 $ 2,028 $ 7 $ 99,982 $ 29 $ 1
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 24,667 683 -- 49,283 7 --
--------- ------- ----- ----------- ------ ---
Net investment income
(loss).................. 144,014 1,345 7 50,699 22 1
--------- ------- ----- ----------- ------ ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 231,984 94 16
Net realized gain (loss)
from sales of
investments............. -- -- -- 57,606 128 --
--------- ------- ----- ----------- ------ ---
Net realized gain
(loss)................ -- -- -- 289,590 222 16
Net unrealized gain
(loss).................. -- -- -- 1,759,333 (123) 25
--------- ------- ----- ----------- ------ ---
Net realized and
unrealized gain
(loss)................ -- -- -- 2,048,923 99 41
--------- ------- ----- ----------- ------ ---
Net increase (decrease)
in net assets from
operations............ $ 144,014 $ 1,345 $ 7 $ 2,099,622 $ 121 $42
--------- ------- ----- ----------- ------ ---
--------- ------- ----- ----------- ------ ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
FOR THE SELECT AGGRESSIVE GROWTH
YEAR ENDED FOR THE FOR THE
DECEMBER PERIOD YEAR ENDED FOR THE
31, 5/1/95** DECEMBER 31, PERIOD
----------- TO ---------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----- ---- --------- -------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $837 $57 $ 9 $ -- $ -- $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 19 8 -- 706 10 --
----- ---- --- -------- ------ -----
Net investment income
(loss).................. 818 49 9 (706) (10) --
----- ---- --- -------- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- -- -- 17,916 464 --
Net realized gain (loss)
from sales of
investments............. 1 5 -- 748 182 --
----- ---- --- -------- ------ -----
Net realized gain
(loss)................ 1 5 -- 18,664 646 --
Net unrealized gain
(loss).................. (88) (2) 7 3,863 (425) 49
----- ---- --- -------- ------ -----
Net realized and
unrealized gain
(loss)................ (87) 3 7 22,527 221 49
----- ---- --- -------- ------ -----
Net increase (decrease)
in net assets from
operations............ $731 $52 $16 $ 21,821 $ 211 $ 49
----- ---- --- -------- ------ -----
----- ---- --- -------- ------ -----
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------- 5/1/95** ---------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
----------- ------ -------------- -------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 20,160 $ 5 $ -- $ 1,134 $ 10 $ 2
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 39,740 2 -- 365 2 --
----------- ------ ----- -------- ------ ---
Net investment income
(loss).................. (19,580) 3 -- 769 8 2
----------- ------ ----- -------- ------ ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 363,902 233 -- 13,936 143 9
Net realized gain (loss)
from sales of
investments............. 51,101 92 -- 296 63 --
----------- ------ ----- -------- ------ ---
Net realized gain
(loss)................ 415,003 325 -- 14,232 206 9
Net unrealized gain
(loss).................. 1,431,596 (229) 37 (5,403) (126) 30
----------- ------ ----- -------- ------ ---
Net realized and
unrealized gain
(loss)................ 1,846,599 96 37 8,829 80 39
----------- ------ ----- -------- ------ ---
Net increase (decrease)
in net assets from
operations............ $ 1,827,019 $ 99 $ 37 $ 9,598 $ 88 $41
----------- ------ ----- -------- ------ ---
----------- ------ ----- -------- ------ ---
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
--------------- TO ------------------ 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
-------- ----- --------- --------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 1,289 $ 40 $ 1 $ 131,715 $ 1,124 $ 2
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 633 19 -- 35,909 119 --
-------- ----- --- --------- ------- ---
Net investment income
(loss).................. 656 21 1 95,806 1,005 2
-------- ----- --- --------- ------- ---
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 30,900 252 6 182,156 136 1
Net realized gain (loss)
from sales of
investments............. 700 142 -- 11,256 70 --
-------- ----- --- --------- ------- ---
Net realized gain
(loss)................ 31,600 394 6 193,412 206 1
Net unrealized gain
(loss).................. (5,610) 195 14 (15,069) 3,759 23
-------- ----- --- --------- ------- ---
Net realized and
unrealized gain
(loss)................ 25,990 589 20 178,343 3,965 24
-------- ----- --- --------- ------- ---
Net increase (decrease)
in net assets from
operations............ $ 26,646 $ 610 $21 $ 274,149 $ 4,970 $26
-------- ----- --- --------- ------- ---
-------- ----- --- --------- ------- ---
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
--------------- 5/1/95** --------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------ -------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ -- $ -- $ 5 $ 351 $ 19 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 204 58 -- 119 5 --
------- ------ --- ------- ------ -----
Net investment income
(loss).................. (204) (58) 5 232 14 --
------- ------ --- ------- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... -- 28 -- 43 4 --
Net realized gain (loss)
from sales of
investments............. 544 53 -- 94 42 --
------- ------ --- ------- ------ -----
Net realized gain
(loss)................ 544 81 -- 137 46 --
Net unrealized gain
(loss).................. 6,529 (147) 74 2,892 66 21
------- ------ --- ------- ------ -----
Net realized and
unrealized gain
(loss)................ 7,073 (66) 74 3,029 112 21
------- ------ --- ------- ------ -----
Net increase (decrease)
in net assets from
operations............ $ 6,869 $ (124) $ 79 $ 3,261 $ 126 $ 21
------- ------ --- ------- ------ -----
------- ------ --- ------- ------ -----
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP
EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD YEAR ENDED FOR THE
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
-------------- TO ----------------- 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
------- ----- --------- -------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 91 $ 1 $ 4 $ 2,224 $ 1 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 177 7 -- 1,311 832 --
------- ----- --- -------- ------- -----
Net investment income
(loss).................. (86) (6) 4 913 (831) --
------- ----- --- -------- ------- -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 457 16 -- 9,956 21 --
Net realized gain (loss)
from sales of
investments............. 242 68 -- 16,498 151 --
------- ----- --- -------- ------- -----
Net realized gain
(loss)................ 699 84 -- 26,454 172 --
Net unrealized gain
(loss).................. 5,483 87 36 43,944 2,233 48
------- ----- --- -------- ------- -----
Net realized and
unrealized gain
(loss)................ 6,182 171 36 70,398 2,405 48
------- ----- --- -------- ------- -----
Net increase (decrease)
in net assets from
operations............ $ 6,096 $165 $40 $ 71,311 $ 1,574 $ 48
------- ----- --- -------- ------- -----
------- ----- --- -------- ------- -----
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
FOR THE FOR THE
YEAR ENDED FOR THE YEAR ENDED FOR THE
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
---------------- 5/1/95** ----------------- 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- -------------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 344 $ 3 $ -- $ 6,739 $ 10 $ --
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 205 76 -- 994 501 --
------- ------- ----- -------- ------- -----
Net investment income
(loss).................. 139 (73) -- 5,745 (491) --
------- ------- ----- -------- ------- -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,365 3 -- 16,905 8 --
Net realized gain (loss)
from sales of
investments............. 201 138 -- 499 130 --
------- ------- ----- -------- ------- -----
Net realized gain
(loss)................ 1,566 141 -- 17,404 138 --
Net unrealized gain
(loss).................. 285 1,222 15 28,899 7,451 25
------- ------- ----- -------- ------- -----
Net realized and
unrealized gain
(loss)................ 1,851 1,363 15 46,303 7,589 25
------- ------- ----- -------- ------- -----
Net increase (decrease)
in net assets from
operations............ $ 1,990 $ 1,290 $ 15 $ 52,048 $ 7,098 $ 25
------- ------- ----- -------- ------- -----
------- ------- ----- -------- ------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK FOR THE DGPF INTERNATIONAL EQUITY INVESCO INDUSTRIAL INCOME
FOR THE PERIOD FOR THE FOR THE FOR THE FOR THE
YEAR ENDED 2/9/96** YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, TO DECEMBER 31, 7/2/96** DECEMBER 31, 7/2/96**
1997 12/31/96 1997 TO 12/31/96 1997 TO 12/31/96
------------- ---------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................. $ 898 $ 468 $ 118 $ -- $ 112 $ 56
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 560 352 251 2 23 2
------ ---------- ----- ----- ------ -----
Net investment income
(loss).................. 338 116 (133) (2) 89 54
------ ---------- ----- ----- ------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 1,272 281 -- -- 398 154
Net realized gain (loss)
from sales of
investments............. 183 921 164 18 25 25
------ ---------- ----- ----- ------ -----
Net realized gain
(loss)................ 1,455 1,202 164 18 423 179
Net unrealized gain
(loss).................. (326) 3,447 (695) 68 752 (141)
------ ---------- ----- ----- ------ -----
Net realized and
unrealized gain
(loss)................ 1,129 4,649 (531) 86 1,175 38
------ ---------- ----- ----- ------ -----
Net increase (decrease)
in net assets from
operations............ $1,467 $4,765 $(664) $ 84 $1,264 $ 92
------ ---------- ----- ----- ------ -----
------ ---------- ----- ----- ------ -----
<CAPTION>
INVESCO TOTAL RETURN
FOR THE FOR THE
YEAR ENDED PERIOD
DECEMBER 31, 7/2/96**
1997 TO 12/31/96
------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends................. $1,045 $458
EXPENSES (NOTE 4):
Mortality and expense risk
fees.................... 137 22
------ -----
Net investment income
(loss).................. 908 436
------ -----
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain
distributions from
portfolio sponsors...... 245 1
Net realized gain (loss)
from sales of
investments............. 31 247
------ -----
Net realized gain
(loss)................ 276 248
Net unrealized gain
(loss).................. 5,287 (38)
------ -----
Net realized and
unrealized gain
(loss)................ 5,563 210
------ -----
Net increase (decrease)
in net assets from
operations............ $6,471 $646
------ -----
------ -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH
PERIOD INVESTMENT GRADE INCOME
YEAR ENDED FROM YEAR ENDED
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
---------------------- TO ------------------ FROM 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----------- --------- ---------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 13,225 $ 969 $ 4 $ 550,127 $ 14 $ 11
Net realized gain
(loss)................ 304,724 51,631 18 7,069 -- --
Net unrealized gain
(loss)................ (57,127) (33,389) 17 282,868 (6) 11
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
operations............ 260,822 19,211 39 840,064 8 22
----------- --------- ----- ----------- ----- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 793,195 638,444 -- 9,313,499 -- --
Terminations............ (2,053) -- -- -- -- --
Insurance and other
charges............... (3,267) (2) -- (447,871) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 68,391 617 -- 138,693 -- --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (283) 200 -- -- 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 856,266 638,776 200 9,004,321 -- 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets......... 1,117,088 657,987 239 9,844,385 8 222
NET ASSETS:
Beginning of period....... 658,226 239 -- 230 222 --
----------- --------- ----- ----------- ----- -----
End of period............. $ 1,775,314 $ 658,226 $239 $ 9,844,615 $ 230 $222
----------- --------- ----- ----------- ----- -----
----------- --------- ----- ----------- ----- -----
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
------------------------ FROM 5/1/95** -------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------------ ---------- --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 144,014 $ 1,345 $ 7 $ 50,699 $ 22 $ 1
Net realized gain
(loss)................ -- -- -- 289,590 222 16
Net unrealized gain
(loss)................ -- -- -- 1,759,333 (123) 25
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
operations............ 144,014 1,345 7 2,099,622 121 42
------------ ---------- ----- ----------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 30,656,799 924,390 -- 6,793,979 6,564 --
Terminations............ (31) (13) -- (198) -- --
Insurance and other
charges............... (704,864) (110,367) -- (364,580) -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... (1,673,553) (737,246) -- 8,392 14 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- (217) 200 -- (256) 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 28,278,351 76,547 200 6,437,593 6,322 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets......... 28,422,365 77,892 207 8,537,215 6,443 242
NET ASSETS:
Beginning of period....... 78,099 207 -- 6,685 242 --
------------ ---------- ----- ----------- ------- -----
End of period............. $ 28,500,464 $ 78,099 $207 $ 8,543,900 $ 6,685 $242
------------ ---------- ----- ----------- ------- -----
------------ ---------- ----- ----------- ------- -----
</TABLE>
** Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND
PERIOD SELECT AGGRESSIVE GROWTH
YEAR ENDED FROM YEAR ENDED
DECEMBER 31, 5/1/95** DECEMBER 31, PERIOD
---------------------- TO ------------------ FROM 5/1/95**
1997 1996 12/31/95 1997 1996 TO 12/31/95
----------- --------- ---------- ----------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 818 $ 49 $ 9 $ (706) $ (10) $ --
Net realized gain
(loss)................ 1 5 -- 18,664 646 --
Net unrealized gain
(loss)................ (88) (2) 7 3,863 (425) 49
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
operations............ 731 52 16 21,821 211 49
----------- --------- ----- ----------- ----- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 5,649 2,984 -- 98,882 8,376 --
Terminations............ (713) -- -- (3,662) -- --
Insurance and other
charges............... (163) (54) -- (3,465) (71) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 31,189 (58) -- 117,027 (17) --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (223) 200 -- (296) 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 35,962 2,649 200 208,782 7,992 200
----------- --------- ----- ----------- ----- -----
Net increase (decrease)
in net assets......... 36,693 2,701 216 230,603 8,203 249
NET ASSETS:
Beginning of period....... 2,917 216 -- 8,452 249 --
----------- --------- ----- ----------- ----- -----
End of period............. $ 39,610 $ 2,917 $216 $ 239,055 $8,452 $249
----------- --------- ----- ----------- ----- -----
----------- --------- ----- ----------- ----- -----
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
------------------------ FROM 5/1/95** -------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------------ ---------- --------------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (19,580) $ 3 $ -- $ 769 $ 8 $ 2
Net realized gain
(loss)................ 415,003 325 -- 14,232 206 9
Net unrealized gain
(loss)................ 1,431,596 (229) 37 (5,403) (126) 30
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
operations............ 1,827,019 99 37 9,598 88 41
------------ ---------- ----- ----------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 5,368,817 1,756 -- 65,720 2,353 --
Terminations............ (18) -- -- (4,379) -- --
Insurance and other
charges............... (292,989) (4) -- (3,633) (4) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 77,472 4 (1) 102,491 (27) --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (285) 200 -- (286) 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 5,153,282 1,471 199 160,199 2,036 200
------------ ---------- ----- ----------- ------- -----
Net increase (decrease)
in net assets......... 6,980,301 1,570 236 169,797 2,124 241
NET ASSETS:
Beginning of period....... 1,806 236 -- 2,365 241 --
------------ ---------- ----- ----------- ------- -----
End of period............. $ 6,982,107 $ 1,806 $236 $ 172,162 $ 2,365 $241
------------ ---------- ----- ----------- ------- -----
------------ ---------- ----- ----------- ------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY* SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
---------------- FROM 5/1/95** ------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
-------- ------ --------------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 656 $ 21 $ 1 $ 95,806 $ 1,005 $ 2
Net realized gain
(loss)................ 31,600 394 6 193,412 206 1
Net unrealized gain
(loss)................ (5,610) 195 14 (15,069) 3,759 23
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets from
operations............ 26,646 610 21 274,149 4,970 26
-------- ------ ----- ---------- ------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 151,059 5,481 -- 5,449,561 57,697 --
Terminations............ (3,904) -- -- (8) -- --
Insurance and other
charges............... (4,266) -- -- (259,243) (59) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 59,502 (40) -- 109,691 108 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (275) 200 -- (266) 200
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 202,391 5,166 200 5,300,001 57,480 200
-------- ------ ----- ---------- ------- -----
Net increase (decrease)
in net assets......... 229,037 5,776 221 5,574,150 62,450 226
NET ASSETS:
Beginning of period....... 5,997 221 -- 62,676 226 --
-------- ------ ----- ---------- ------- -----
End of period............. $235,034 $5,997 $221 $5,636,826 $62,676 $226
-------- ------ ----- ---------- ------- -----
-------- ------ ----- ---------- ------- -----
<CAPTION>
SELECT CAPITAL APPRECIATION FIDELITY VIP HIGH INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
---------------- FROM 5/1/95** --------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- --------------- ------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (204) $ (58) $ 5 $ 232 $ 14 $ --
Net realized gain
(loss)................ 544 81 -- 137 46 --
Net unrealized gain
(loss)................ 6,529 (147) 74 2,892 66 21
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets from
operations............ 6,869 (124) 79 3,261 126 21
------- ------- ----- ------- ------ -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 53,911 15,400 -- 37,542 3,933 --
Terminations............ (3,829) -- -- (1,972) -- --
Insurance and other
charges............... (1,570) (214) -- (1,317) (16) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... (4,994) (44) -- 1,864 37 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (299) 200 -- (250) 200
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets from
capital
transactions.......... 43,518 14,843 200 36,117 3,704 200
------- ------- ----- ------- ------ -----
Net increase (decrease)
in net assets......... 50,387 14,719 279 39,378 3,830 221
NET ASSETS:
Beginning of period....... 14,998 279 -- 4,051 221 --
------- ------- ----- ------- ------ -----
End of period............. $65,385 $14,998 $279 $43,429 $4,051 $221
------- ------- ----- ------- ------ -----
------- ------- ----- ------- ------ -----
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, PERIOD
--------------- FROM 5/1/95** ------------------- FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------ --------------- --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (86) $ (6) $ 4 $ 913 $ (831) $ --
Net realized gain
(loss)................ 699 84 -- 26,454 172 --
Net unrealized gain
(loss)................ 5,483 87 36 43,944 2,233 48
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets from
operations............ 6,096 165 40 71,311 1,574 48
------- ------ ----- --------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 49,237 4,266 -- 137,061 326,955 --
Terminations............ (817) -- -- (17,376) (2) --
Insurance and other
charges............... (1,985) -- -- (4,065) (261) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 2,004 46 -- (169,701) 99 1
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (271) 200 -- (285) 200
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 48,439 4,041 200 (54,081) 326,506 201
------- ------ ----- --------- -------- -----
Net increase (decrease)
in net assets......... 54,535 4,206 240 17,230 328,080 249
NET ASSETS:
Beginning of period....... 4,446 240 -- 328,329 249 --
------- ------ ----- --------- -------- -----
End of period............. $58,981 $4,446 $240 $ 345,559 $328,329 $249
------- ------ ----- --------- -------- -----
------- ------ ----- --------- -------- -----
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
YEAR ENDED YEAR ENDED
DECEMBER 31, PERIOD DECEMBER 31, FROM
---------------- FROM 5/1/95** ------------------ FROM 5/1/95**
1997 1996 TO 12/31/95 1997 1996 TO 12/31/95
------- ------- --------------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 139 $ (73) $ -- $ 5,745 $ (491) $ --
Net realized gain
(loss)................ 1,566 141 -- 17,404 138 --
Net unrealized gain
(loss)................ 285 1,222 15 28,899 7,451 25
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets from
operations............ 1,990 1,290 15 52,048 7,098 25
------- ------- ----- -------- -------- -----
FROM CAPITAL TRANSACTIONS:
Net premiums............ 31,760 17,543 -- 142,926 184,389 --
Terminations............ (184) (1) -- (172) (1) --
Insurance and other
charges............... (1,796) (460) -- (455) (13) --
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 687 (36) -- (14,595) 246 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- (237) 200 -- (257) 200
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets from
capital
transactions.......... 30,467 16,809 200 127,704 184,364 200
------- ------- ----- -------- -------- -----
Net increase (decrease)
in net assets......... 32,457 18,099 215 179,752 191,462 225
NET ASSETS:
Beginning of period....... 18,314 215 -- 191,687 225 --
------- ------- ----- -------- -------- -----
End of period............. $50,771 $18,314 $215 $371,439 $191,687 $225
------- ------- ----- -------- -------- -----
------- ------- ----- -------- -------- -----
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
T. ROWE PRICE INTERNATIONAL INVESCO
STOCK DGPF INTERNATIONAL EQUITY INVESCO INDUSTRIAL INCOME TOTAL RETURN
YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED PERIOD YEAR ENDED
DECEMBER 31, FROM 2/9/96** DECEMBER 31, FROM 7/2/96** DECEMBER 31, FROM 7/2/96** DECEMBER 31,
1997 TO 12/31/96 1997 TO 12/31/96 1997 TO 12/31/96 1997
------------ ------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 338 $ 116 $ (133) $ (2) $ 89 $ 54 $ 908
Net realized gain
(loss)................ 1,455 1,202 164 18 423 179 276
Net unrealized gain
(loss)................ (326) 3,447 (695) 68 752 (141) 5,287
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets from
operations............ 1,467 4,765 (664) 84 1,264 92 6,471
------------ ------------- ------------- ------ ------ ------ ------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 36,785 55,319 82,362 2,639 2,869 3,228 26,884
Terminations............ -- -- (1,381) -- -- -- --
Insurance and other
charges............... (1,021) -- (1,510) -- (242) (9) (764)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 532 (18) 1,096 7 3 6 32
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... -- -- -- -- -- -- --
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets from
capital
transactions.......... 36,296 55,301 80,567 2,646 2,630 3,225 26,152
------------ ------------- ------------- ------ ------ ------ ------------
Net increase (decrease)
in net assets......... 37,763 60,066 79,903 2,730 3,894 3,317 32,623
NET ASSETS:
Beginning of period....... 60,066 -- 2,730 -- 3,317 -- 17,602
------------ ------------- ------------- ------ ------ ------ ------------
End of period............. $97,829 $60,066 $82,633 $2,730 $7,211 $3,317 $50,225
------------ ------------- ------------- ------ ------ ------ ------------
------------ ------------- ------------- ------ ------ ------ ------------
<CAPTION>
PERIOD
FROM 7/2/96**
TO 12/31/96
-------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 436
Net realized gain
(loss)................ 248
Net unrealized gain
(loss)................ (38)
-------------
Net increase (decrease)
in net assets from
operations............ 646
-------------
FROM CAPITAL TRANSACTIONS:
Net premiums............ 17,025
Terminations............ --
Insurance and other
charges............... (117)
Other transfers from
(to) the General
Account of
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... 48
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity
Company (Sponsor)..... --
-------------
Net increase (decrease)
in net assets from
capital
transactions.......... 16,956
-------------
Net increase (decrease)
in net assets......... 17,602
NET ASSETS:
Beginning of period....... --
-------------
End of period............. $17,602
-------------
-------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company) established on May 1,
1995 for the purpose of separating from the general assets of the Company, those
assets used to fund the variable portion of certain flexible premium variable
life policies issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Group VEL are
clearly identified and distinguished from the other assets and liabilities of
the Company. Group VEL cannot be charged with liabilities arising out of any
other business of the Company.
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty-one
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc., or of The Morgan Stanley
Universal Funds, Inc. (Morgan Stanley) managed by Miller Anderson & Sherrerd,
LLP. The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO and
Morgan Stanley (the Funds) are open-end, diversified management investment
companies registered under the 1940 Act. INVESCO is available only to employees
of INVESCO and its affiliates. Morgan Stanley is available only to employees of
Duke Energy Corporation and its affiliates.
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, the portfolio changed its name to Select Value Opportunity
Fund.
Certain prior year balances have been reclassified to conform with current year
presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the
Sub-Accounts are stated at the net asset value per share of the respective
investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price,
DGPF, INVESCO, or Morgan Stanley. 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, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, or Morgan Stanley at net
asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return with First Allmerica. The
SA-14
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company anticipates no tax liability resulting from the operations of Group VEL.
Therefore, no provision for income taxes has been charged against Group VEL.
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, Fidelity VIP II, T.
Rowe Price, DGPF, INVESCO and Morgan Stanley 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>
ALLMERICA INVESTMENT TRUST:
Growth............................................... 734,812 $ 1,865,806 $ 2.416
Investment Grade Income.............................. 8,853,022 9,561,687 1.112
Money Market......................................... 28,500,493 28,500,493 1.000
Equity Index......................................... 3,103,505 6,784,715 2.753
Government Bond...................................... 37,832 39,693 1.047
Select Aggressive Growth............................. 107,441 235,568 2.225
Select Growth........................................ 3,855,415 5,550,754 1.811
Select Growth and Income............................. 110,929 177,661 1.552
Select Value Opportunity*............................ 144,547 240,435 1.626
Select International Equity.......................... 4,203,450 5,648,114 1.341
Select Capital Appreciation.......................... 38,530 58,929 1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income.......................................... 3,198 40,450 13.580
Equity-Income........................................ 2,429 53,374 24.280
Growth............................................... 9,314 299,332 37.100
Overseas............................................. 2,644 49,249 19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager........................................ 20,624 335,065 18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock.................................. 7,679 94,707 12.740
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity................................. 5,324 83,261 15.520
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
Industrial Income.................................... 423 6,601 17.040
Total Return......................................... 3,177 44,975 15.810
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Fixed Income......................................... -- -- --
</TABLE>
* Name changed. See Note 1.
SA-15
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of up to $10. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended December 31, 1997 and 1996, these monthly deductions from sub-account
policy values amounted to $2,099,066 and $335,040, respectively. For the period
ended December 31, 1995, there were no monthly deductions from sub-account
policy values. These amounts are included on the statements of changes in net
assets in Insurance and other charges.
The Company makes a charge of up to .90% per annum based on the average daily
net assets of each
Sub-Account at each valuation date for mortality and expense risks. This charge
may be increased or decreased by the Board of Directors of the Company once each
year, subject to compliance with applicable state and federal requirements, but
the total charge may not exceed .90% per annum. During the first 10 policy
years, the Company also charges each Sub-Account up to .25% per annum based on
the average daily net assets of each Sub-Account for administrative expenses.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned subsidiary
of First Allmerica, is principal underwriter and general distributor of Group
VEL, and does not receive any compensation for sales of Group VEL policies.
Commissions are paid to registered representatives of Allmerica Investments or
of independent broker-dealers by the Company. As the current series of policies
have a surrender charge, no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1997, 1996 and 1995, there were no
surrender charges applicable to Group VEL.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
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 Group VEL satisfies the current requirements of
the regulations, and it intends that Group VEL will continue to meet such
requirements.
SA-16
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF, INVESCO and Morgan Stanley shares by Group VEL
during the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
ALLMERICA INVESTMENT TRUST:
Growth.......................................................... $ 1,457,017 $ 304,906
Investment Grade Income......................................... 10,029,950 475,557
Money Market.................................................... 30,454,456 2,032,062
Equity Index.................................................... 7,084,692 364,366
Government Bond................................................. 37,760 980
Select Aggressive............................................... 234,349 8,357
Select Growth................................................... 5,809,325 311,671
Select Growth and Income........................................ 184,500 9,596
Select Value Opportunity*....................................... 244,287 10,342
Select International Equity..................................... 5,839,070 261,107
Select Capital Appreciation..................................... 56,171 12,857
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
High Income..................................................... 40,488 4,096
Equity-Income................................................... 53,137 4,327
Growth.......................................................... 162,155 205,367
Overseas........................................................ 34,993 3,022
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
Asset Manager................................................... 167,958 17,604
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
International Stock............................................. 39,576 1,670
DELAWARE GROUP PREMIUM FUND, INC.:
International Equity............................................ 84,554 4,120
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
Industrial Income............................................... 3,949 832
Total Return.................................................... 32,380 5,075
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Fixed Income.................................................... -- --
------------ ------------
$ 62,050,767 $ 4,037,914
------------ ------------
------------ ------------
</TABLE>
* Name changed. See Note 1.
SA-17
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
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.
RULE 484 UNDERTAKING
Article VIII of Registrant's Bylaws provides: Each Director and each officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation against
all expenses actually and necessarily incurred by him in the defense or
reasonable settlement of any action, suit, or proceeding in which he is made a
party by reason of his being or having been a Director or officer of the
Corporation, including any sums paid in settlement or to discharge judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the 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 the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the 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, the 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.
REPRESENTATIONS PURSUANT TO SECTION 26(E) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-references for Prospectuses A, B and C to items required by Form N-8B-2.
The prospectus A consisting of _____ pages.
The prospectus B consisting of _____ pages.
The prospectus C consisting of _____ pages.
The undertaking to file reports.
The undertaking pursuant to Rule 484 under the 1933 Act.
Representations pursuant to Section 26(e) of the 1940 Act.
The signatures.
Written consents of the following persons:
1. Actuarial Consent
2. Opinion of Counsel
3. Consent of Independent Accountants
The following exhibits:
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company of November 22, 1993 establishing the Group VEL Account
was previously filed in Post-Effective Amendment No. 9 on April
16, 1998 and is incorporated by reference herein.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement between
the Company and Allmerica Investments, Inc. was previously
filed in Post-Effective Amendment No. 9 on April 16, 1998
and is incorporated by reference herein.
(b) Registered Representatives/Agents Agreement was previously
filed in Post-Effective Amendment No. 9 on April 16, 1998
and is incorporated by reference herein.
(c) Sales Agreements were previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and are incorporated by
reference herein.
(d) Sales Agreement with Chase was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998 and is
incorporated by reference herein.
(e) Commission Schedule was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and is incorporated by
reference herein.
(f) General Agent's Agreement was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998 and is
incorporated by reference herein.
(g) Career Agent Agreement was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998 and is
incorporated by reference herein.
<PAGE>
(h) Form of Delaware Wholesaling Agreement is filed herewith.
(4) Not Applicable.
(5) Policy and initial Riders were previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and are incorporated by
reference herein. The Preferred Loan Endorsement and Exchange to
Term Rider were previously filed in Post-Effective Amendment No.
5 on April 30, 1997 and are incorporated by reference herein.
(6) Articles of Incorporation and Bylaws, as amended, of the Company
were previously filed in Post-Effective Amendment No. 1 on
October 1, 1995 and are incorporated by reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement with Allmerica Investment Trust was
previously filed in Post-Effective Amendment No. 9 on April
16, 1998 and is incorporated by reference herein.
(b) Participation Agreement, as amended, with Variable Insurance
Products Fund was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and is incorporated by
reference herein.
(c) Participation Agreement, as amended, with Variable Insurance
Products Fund II was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and is incorporated by
reference herein.
(d) Form of Amendment to Participation Agreement with Delaware
Group Premium Fund, Inc. is filed herewith. Participation
Agreement with Delaware Group Premium Fund, Inc. was
previously filed in Post-Effective Amendment No. 9 on April
16, 1998 and is incorporated by reference herein.
(e) Participation Agreement with T. Rowe Price International
Series, Inc. was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and is incorporated by
reference herein.
(f) Participation Agreement with Invesco Funds Group, Inc. was
previously filed in Post-Effective Amendment No. 9 on April
16, 1998 and is incorporated by reference herein.
(g) Fidelity Service Agreement, effective as of November 1,
1995, was previously filed on April 30, 1996 in
Post-Effective Amendment No. 3 and is incorporated by
reference herein.
(h) An Amendment to the Fidelity Services Agreement, effective
as of January 1, 1997, was previously filed on April 30,
1997 in Post-Effective Amendment No. 3 and is incorporated
by reference herein.
(i) Fidelity Service Contract, effective as of January 1, 1997,
was previously filed on April 30, 1997 in Post-Effective
Amendment No. 3 and is incorporated by reference herein
(j) Service Agreement with Rowe Price-Fleming International,
Inc. was previously filed in Post-Effective Amendment No. 9
on April 16, 1998 and is incorporated by reference herein.
(k) Service Fee Agreement Letter with Morgan Stanley Asset
Management, Inc., was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998 and is incorporated by
reference herein.
<PAGE>
(l) Participation Agreement with Morgan Stanley was previously
filed in Post-Effective Amendment No. 9 on April 16, 1998
and is incorporated by reference herein.
(m) Participation Agreement with Mutual Fund Variable Annuity
Trust is filed herewith.
(9) Not Applicable.
(10) Amended Applications are filed herewith. Application was
previously filed in Post-Effective Amendment No. 9 on April 16,
1998 and is incorporated by reference herein.
2. Policy and Policy riders are as set forth in Item 1(5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum dated August, 1994 pursuant to Rule
6e-3(T)(b)(12)(iii) under the 1940 Act which includes conversion
procedures pursuant to Rule 6e-3(T)(b)(13)(v)(B) was previously filed
in Post-Effective Amendment No. 9 on April 16, 1998 and is
incorporated by reference herein.
8. Consent of Independent Accountants is filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts, on the 2nd day of October, 1998.
GROUP VEL ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY 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 below by the following persons in the capacities and
on the dates indicated.
Signatures Title Date
---------- ----- -----
/s/ John F. O'Brien Director and Chairman of October 2, 1998
- --------------------------- the Board
John F. O'Brien
/s/ Bruce C. Anderson Director
- ---------------------------
Bruce C. Anderson
/s/ Warren E. Barnes Vice President and Corporate
- --------------------------- Controller
Warren E. Barnes
/s/ Robert E. Bruce Director 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, 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 and Treasurer
Edward J. Parry III
/s/ Richard M. Reilly Director, President and
- --------------------------- Chief Executive Officer
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director
- ---------------------------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President
- ---------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director
- ---------------------------
Phillip E. Soule
<PAGE>
FORMS S-6 EXHIBIT TABLE
Exhibit 1(3)(h) Form of Delaware Wholesaling Agreement
Exhibit 1(8)(d) Form of Amendment to Participation Agreement with
Delaware Group Premium Fund, Inc.
Exhibit 1(8)(m) Participation Agreement with Mutual Fund Variable
Annuity Trust
Exhibit 1(10) Amended Applications
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
WHOLESALING AGREEMENT
AGREEMENT, effective as of ____________________, 1998, by and between
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY, a Delaware insurance
company ("AFLIAC"), FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, a
Massachusetts insurance company ("FAFLIC" and, together with AFLIAC,
collectively, the "Companies"), ALLMERICA INVESTMENTS, INC., a Massachusetts
corporation (the "Underwriter") and DELAWARE DISTRIBUTORS, L.P., a Delaware
limited partnership (the "Wholesaler").
WITNESSETH:
WHEREAS, the Companies have registered or propose to register with the
Securities and Exchange Commission interests in certain variable life
insurance contracts under the Securities Act of 1933 and propose to issue and
sell such contracts through the Underwriter acting as the principal
underwriter for such contracts; and
WHEREAS, the Companies, the Underwriter and the Wholesaler desire to
establish an arrangement whereby the Wholesaler will act as the wholesaler
for such variable life insurance contracts and, as such, will recruit
business firms to distribute such contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Companies, the
Underwriter and the Wholesaler hereby agree as follows:
1
<PAGE>
1. DEFINITIONS
a. ACCOUNT - Each and any separate account established by AFLIAC or
FAFLIC and listed on Schedule 2 to this Agreement, as amended from
time to time. The phrase "Account supporting the Contracts" or
"Account supporting a class of Contracts" shall mean the separate
account identified in such Contracts as the separate account to which
premiums paid under such Contracts are allocated and as to which
income, gains and losses, whether or not realized, from assets
allocated to such separate account, are, in accordance with such
Contracts, credited to or charged against such separate account
without regard to other income, gains, or losses of the Companies or
any other separate account established by the Companies.
b. ASSOCIATED PERSON - This term as used in this Agreement shall have
the meaning assigned to it in the 1934 Act.
c. BROKER-DEALER - An entity registered as a broker-dealer and
licensed as a life insurance agent or affiliated with an entity so
licensed, and recruited by the Wholesaler and subsequently
authorized by AFLIAC and/or FAFLIC and the Underwriter to
distribute the Contracts pursuant to a sales agreement with the
Companies and/or the Underwriter entered into in accordance with
Section 3 of this Agreement.
d. CONTRACTS - The variable life insurance contracts utilizing the
Delaware Group Premium Fund ("DGPF") Portfolios listed on Schedule 3
hereto, described more specifically on Schedule 3 to this
Agreement, as amended from time to time. The term "Contracts"
shall include any riders to such contracts and any other contracts
offered in connection therewith or any contracts for which such
Contracts may be exchanged or converted. The phrase "a class of
Contracts" shall mean those variable life insurance contracts
issued on the same policy form or forms and covered by the same
Registration Statement, as shown on Schedule 3 to this Agreement.
2
<PAGE>
e. FUND - The term "Fund" shall mean the Delaware Group Premium Fund,
Inc.
f. FUND PROSPECTUS - At any time while this Agreement is in effect,
the prospectus and statement of additional information for the
Fund most recently filed with the SEC pursuant to Rule 497 under
the 1933 Act. (For purposes of Section 11 of this Agreement,
however, the term "Fund Prospectus" means any document that is or
at any time was a Fund Prospectus within the meaning of this
Section 1.g.).
g. FUND REGISTRATION STATEMENT - At any time while this Agreement is
in effect, the currently effective registration statement filed
with the SEC under the 1933 Act, or currently effective
post-effective amendment thereto, for shares of the Fund. (For
purposes of Section 11 of this Agreement, however, the term "Fund
Registration Statement" means any document that is or at any time
was a Fund Registration Statement within the meaning of this
Section 1.f.).
h. NASD - The National Association of Securities Dealers, Inc.
I. 1933 ACT - The Securities Act of 1933, as amended.
j. 1934 ACT - The Securities Exchange Act of 1934, as amended.
k. 1940 ACT - The Investment Company Act of 1940, as amended.
l. PARTICIPATION AGREEMENT - The agreement among AFLIAC or FAFLIC, as
appropriate, the Wholesaler and the Fund relating to the investment
of assets of the separate accounts of the Companies in the Fund.
3
<PAGE>
m. PROCEDURES - The administrative procedures prepared and distributed
by the Companies, as such may be amended or supplemented from time
to time, relating to the solicitation, sale and delivery of the
Contracts.
n. PROSPECTUS - The prospectus and any statement of additional
information included within a Registration Statement, except that,
if the prospectus and statement of additional information most
recently filed with the SEC pursuant to Rule 497 under the 1933 Act
after the date on which the Registration Statement became effective
differs from the prospectus and statement of additional information
included within the Registration Statement at the time it became
effective, the term "Prospectus" shall refer to the most recently
filed prospectus and statement of additional information filed
under Rule 497 under the 1933 Act from and after the date on which
they each shall have been filed. (For purposes of Sections 5.a.
and 11 of this Agreement, however, the term "any Prospectus" means
any document that is or at any time was a Prospectus within the
meaning of this Section 1.d.).
o. REGISTRATION STATEMENT - At any time while this Agreement is in
effect, the currently effective registration statement filed with
the SEC under the 1933 Act, or currently effective post-effective
amendment thereto, relating to a class of Contracts, including
financial statements included in, and all exhibits to, such
registration statement or post-effective amendment. (For purposes
of Sections 5.a. and 11 of this Agreement, however, the term
"Registration Statement" means any document that is or at any time
was a Registration Statement within the meaning of this
Section 1.c.).
p. REGULATIONS - The rules and regulations promulgated by the SEC under
the 1933 Act, the 1934 Act and the 1940 Act as in effect at the
time this Agreement is executed or thereafter promulgated, and
as they may be amended from time to time.
4
<PAGE>
q. REPRESENTATIVE - An Associated Person of the Wholesaler or a
Broker-Dealer registered with the NASD as a registered representative
or principal of the Wholesaler or Broker-Dealer, as the case may
be.
r. SEC - The Securities and Exchange Commission.
s. STATE - Any state or commonwealth of the United States, the
District of Columbia or any other territory of the United States.
PROVIDED, HOWEVER, that: (i) AFLIAC Contracts shall be marketed
and offered for sale in all States except New York and Hawaii and
(ii) FAFLIC Contracts shall be marketed and offered for sale only
in New York and Hawaii.
t. TERRITORY - The fifty states of the United States, the District of
Columbia, and all other territories of the United States.
2. APPOINTMENT AND WHOLESALING RIGHTS
a. The Companies hereby authorize the Wholesaler to represent the
Companies in the wholesaling activities contemplated by this
Agreement. Where required by relevant state insurance law, the
Companies hereby appoint the Wholesaler as an agent under such
state insurance laws to represent the Companies, or either of them,
as appropriate, in the wholesaling activities contemplated by this
Agreement. In those states in which the Wholesaler is not licensed
as an insurance agent and the relevant state insurance law requires
that the Wholesaler be licensed as an insurance agent, AFLIAC
and/or FAFLIC, as appropriate, hereby appoints the appropriate
entity or individual ("Wholesaler Agency Affiliate") affiliated
with the Wholesaler (as set forth on Schedule 1 to this Agreement,
as such Schedule may be amended from time to time by the Wholesaler
to reflect changes in the licensing status, if any, as required by
relevant state insurance laws) as its agent under the insurance
laws to engage in such wholesaling activities. The Underwriter
hereby authorizes the Wholesaler under applicable securities laws
to engage in the
5
<PAGE>
activities contemplated in this Agreement relating to the wholesaling
of the Contracts for which the Underwriter acts or may act as
principal underwriter.
In jurisdictions where neither the Wholesaler nor any Wholesaler
Agency Affiliate is licensed as contemplated by the first
paragraph of this Section 2.a., when requested in writing by the
Wholesaler, AFLIAC or FAFLIC, as appropriate, will perform such
wholesaling activities related to the Contracts contemplated by
this Agreement as are mutually agreed upon by the Companies and the
Wholesaler. Any such wholesaling activities will be performed as
agent and for the benefit of the Wholesaler, until such time as the
Wholesaler notifies the Companies and the Underwriter that the
Wholesaler or its Wholesaler Agency Affiliate is so licensed. The
Companies shall be compensated by the Wholesaler for their
performance of such wholesaling activities on such basis as is
mutually agreed upon by the Companies and the Wholesaler.
b. The Wholesaler (both on its own behalf and on behalf of Wholesaler
Agency Affiliates) undertakes to use its best efforts to recruit
Broker-Dealers in accordance with Section 3 of this Agreement,
consistent with market conditions and in compliance with its
responsibilities under the federal securities laws and NASD rules
and regulations. The obligations of the Wholesaler and Wholesaler
Agency Affiliates hereunder are further subject to the accuracy of
the representations and warranties of the Companies and the
Underwriter contained in this Agreement and to the performance by
the Companies of their obligations hereunder.
c. On and after the effective date hereof, the appointment and
authorization of the Wholesaler and Wholesaler Agency Affiliates to
engage in wholesaling activities pursuant to this Agreement is
exclusive as to the Contracts listed on Schedule 3, as amended from
time to time in accordance with Section 2.e. of this Agreement.
Neither the Companies nor the Underwriter shall authorize any other
person (as principal underwriter or otherwise) to engage in
wholesaling or distribution activities with respect to the Contracts
6
<PAGE>
or to recruit business firms to engage in wholesaling or
distribution activities with respect to the Contracts (other than
business firms recommended by the Wholesaler pursuant to Section 3
of this Agreement) without the Wholesaler's prior written consent,
nor shall the Companies or the Underwriter, without the
Wholesaler's prior written consent, separately engage in
wholesaling or distribution activities relating to the Contracts.
Notwithstanding the foregoing, the parties understand and agree
that the wholesaling activities contemplated by this Agreement
shall only apply to those variable life insurance Contracts listed
on Schedule 3 that utilize the underlying DGPF Portfolios specified
on Schedule 2. The parties understand that other versions of such
contracts utilize funds other than DGPF Portfolios and that such
contracts are not subject to this Agreement.
The Companies shall design the Contracts, and any amendments or
riders thereto, subject to consultation with the Wholesaler and
subject to the Wholesaler's right to refuse to engage in any future
wholesaling activities with respect to a class of Contracts that
the Wholesaler reasonably determines to be unattractive from a
marketing or business perspective. Throughout the term of this
Agreement, the Contracts shall be issued and offered for sale by
the Companies and the variable portion thereof shall be supported
by the Accounts. The Companies alone shall be responsible for
filing the initial Registration Statements and any amendments
thereto with the SEC in accordance with the 1933 Act, 1934 Act,
1940 Act and the Regulations to register interests in each class of
Contracts. The Companies will not make any amendment or rider to
the Contracts or a class of Contracts, or file or make an amendment
or supplement to a Prospectus, without the Wholesaler having been
given the opportunity to review any such filing, amendment, rider
or supplement. However, such opportunity to review shall not make
the Wholesaler responsible for the content of any such filing,
amendment, rider or supplement; the Companies alone shall be
responsible for such content.
AFLIAC and FAFLIC each shall register its Accounts with the SEC.
All amounts available under the Contracts shall be invested only in
the underlying investment funds
7
<PAGE>
listed on Schedule 2 hereto and/or allocated to the issuing
insurer's general account, PROVIDED THAT such amounts may also be
invested in an investment company or investment vehicle other than
the underlying funds listed on Schedule 2 if: (1) such other
investment company is advised by the Fund's investment adviser;
(2) the Fund and/or the Wholesaler, in their sole discretion, consent
to the use of such other investment company or investment vehicle;
(3) there is a substitution of the Fund made in accordance with
Section 10.1(e) of the Fund Participation Agreement; or (4) a Fund
Participation Agreement is terminated pursuant to Article X of the
Participation Agreement. The Companies will not take action to
operate any Account or any subaccount(s) of an Account investing in
the Fund, as a management investment company under the 1940 Act
without the Fund's and Wholesaler's prior written consent.
d. Except as provided below, the Companies shall obtain appropriate
authorizations, to the extent necessary, whether by registration,
qualification, approval or otherwise, for the issuance and sale of
the Contracts (including all investment options) in each State in
the Territory. From time to time, the Companies shall notify the
Wholesaler in writing of all States in the Territory in which the
Contracts can then lawfully be offered. To the extent that the
Companies are not authorized to issue the Contracts in any State in
the Territory, the Companies shall employ all reasonable efforts to
obtain such authorization in such State (PROVIDED, HOWEVER,
(i) that it shall be within the Companies' discretion whether to
obtain such authorization in Guam, (ii) AFLIAC Contracts shall not be
marketed and offered for sale in New York and Hawaii and
(iii) FAFLIC Contracts shall be marketed and offered for sale only in
New York and Hawaii).
e. The Wholesaler may unilaterally amend Schedule 1 from time to time
pursuant to Section 2.a. of this Agreement. The parties to this
Agreement may amend Schedules 2 and 3 to this Agreement from time
to time by mutual agreement to reflect changes in or relating to
the Contracts and the Accounts and to add new classes of variable
contracts to be issued by the Companies or for which the Wholesaler
will act as wholesaler. Schedule 2
8
<PAGE>
to this Agreement will be automatically amended by the Companies
from time to time to reflect the addition and deletion of
subaccounts and Fund portfolios. All provisions of this Agreement
shall be applicable to all classes of Contracts, unless the
context otherwise requires. Schedule 4 to this Agreement may be
amended only by mutual agreement of the parties to this Agreement
pursuant to Section 9 of this Agreement.
9
<PAGE>
3. RECRUITMENT OF BROKER-DEALERS AND RELATED RESPONSIBILITIES
a. The Companies and the Underwriter hereby authorize the Wholesaler and
any Wholesaler Agency Affiliates to contact and recommend business
firms to act as Broker-Dealers for the sale of the Contracts. The
Companies shall have the right to reject any such recommendation, but
shall not do so arbitrarily or unreasonably.
b. The Companies and the Underwriter shall have the responsibility
for: (i) executing appropriate sales agreements with the business
firms recommended by the Wholesaler or Wholesaler Agency Affiliates
and (ii) appointing such business firms, and/or Associated Persons
of such firms, as insurance agents of the Companies in those States
where such business firms and/or Associated Persons possess
insurance agent licenses. None of the Wholesaler, the Wholesaler
Agency Affiliates, the Companies or the Underwriter shall have
responsibility for, or bear the cost of, any registration or
licensing of Broker-Dealers or any of their Associated Persons with
the SEC or NASD. The costs of state insurance appointments shall
be borne as provided in Section 9.c. hereof. AFLIAC and FAFLIC
each shall maintain the appointment records of all agents appointed
by it to distribute the Contracts or, if required by relevant state
law, to engage in the wholesaling activities contemplated by this
Agreement.
c. Any sales agreement entered into by the Companies and/or the
Underwriter with a Broker-Dealer shall provide that:
(i) The Broker-Dealer (or an affiliated person duly registered as
a broker-dealer with the SEC) shall train, supervise, and be
solely responsible for the conduct of all of its Associated
Persons in the proper method of solicitation, sale and
delivery of the Contracts for the purpose of complying on a
continuous basis with the NASD Rules of Fair Practice and with
federal and state securities and insurance law requirements
applicable in connection with the offering and sale of the
Contracts;
10
<PAGE>
(ii) Premium payments for the Contracts shall be made payable to
AFLIAC or FAFLIC, as appropriate, and shall be delivered
together with all applications and related information in
accordance with the Procedures;
(iii) The Broker-Dealer and/or its duly licensed insurance agency
affiliates shall be solely responsible for all compensation paid
to its Representatives and all related tax reporting that may be
required under applicable law;
(iv) The Broker-Dealer and its Representatives shall not use, develop
or distribute any promotional, sales or advertising material
that has not been approved in writing by the Companies, the
Underwriter and the Wholesaler and filed with the appropriate
governmental or regulatory agencies; and
(v) The Broker-Dealer shall not have authority, on behalf of the
Companies, the Underwriter, the Wholesaler or the Wholesaler
Agency Affiliates, to make, alter or discharge any Contract or
other contract entered into pursuant to a Contract; to waive any
Contract forfeiture provision; to extend the time of paying any
premium payment; to receive any monies or premium payments
(except for the sole purpose of forwarding monies or premium
payments to the issuing insurer); or to expend, or contract for
the expenditure of, funds of the Companies, the Underwriter,
the Wholesaler or the Wholesaler Agency Affiliates.
d. The Wholesaler and Wholesaler Agency Affiliates shall provide such
assistance to the Companies in the appointment procedure applicable
to Broker-Dealers and their Representatives as may be reasonably
requested by the Company.
e. The Wholesaler shall train, supervise, and be solely responsible for
the conduct of all of its Associated Persons (including Wholesaler
Agency Affiliates, but not Broker-Dealers
11
<PAGE>
or their Representatives unaffiliated with the Wholesaler or the
Wholesaler Agency Affiliates), for the purpose of complying on a
continuous basis with the NASD Rules of Fair Practice and with
federal and state securities and insurance laws applicable to the
wholesaling activities contemplated in this Agreement. The
Wholesaler and the Wholesaler Agency Affiliates shall be
responsible for the maintenance of licenses, certifications or
permits that they determine to be necessary for themselves and/or
their Associated Persons pursuant to any federal or state
securities law or state insurance law.
f. None of the Wholesaler, the Wholesaler Agency Affiliates, the
Companies or the Underwriter will have any supervisory responsibility
(as such supervision is contemplated by the 1934 Act or the NASD's
Rules of Fair Practice) with respect to Broker-Dealers or their
Representatives. Under no circumstances will the Wholesaler or the
Wholesaler Agency Affiliates be responsible for Broker-Dealers' or
their Representatives' failure to comply with applicable law or the
Procedures.
g. The Wholesaler shall not have authority on behalf of the Companies
to make, alter or discharge any Contract or other contract entered
into pursuant to a Contract; to waive any Contract forfeiture
provision; to extend the time of paying any premium payment; or to
receive any monies or premium payments. The Wholesaler shall not
expend, nor contract for the expenditure of, funds of the
Companies; nor shall the Wholesaler possess or exercise any
authority on behalf of the Companies other than that expressly
conferred on the Wholesaler by this Agreement.
h. The Wholesaler and the Wholesaler Agency Affiliates shall act as
independent contractors in the performance of their duties and
obligations under this Agreement and nothing contained in this
Agreement shall constitute the Wholesaler or any Wholesaler Agency
Affiliate or their respective Associated Persons as employees of
AFLIAC, FAFLIC or the Underwriter in connection with the wholesaling
activities contemplated by this Agreement or otherwise.
12
<PAGE>
4. MARKETING AND SALES
a. Except as otherwise agreed to by the Companies and the Wholesaler,
the Wholesaler shall be responsible for the design, the cost of the
design work and the printing costs of all promotional, sales and
advertising material relating to the Contracts.
Prior to use with any member of the public, the Wholesaler shall
provide to the Companies copies of all promotional, sales and
advertising material developed by the Wholesaler for the Companies'
review and written approval. Upon receipt of such material from the
Wholesaler, the Companies shall be given a reasonable amount of time
to complete their review. The Companies will respond on a prompt and
timely basis in approving any such material. Failure to respond
shall not relieve the Wholesaler of the obligation to obtain the
prior written approval of the Companies.
In the event that the Companies shall design any promotional, sales
or advertising material relating to the Contracts, the Companies
shall provide to the Wholesaler copies of such material for the
Wholesaler's review and written approval. Upon receipt of such
material from the Companies, the Wholesaler shall be given a
reasonable amount of time to complete its review. The Wholesaler
will respond on a prompt and timely basis in approving any such
material. Failure to respond shall not relieve the Companies of
the obligation to obtain the prior written approval of the
Wholesaler.
The Wholesaler shall be responsible for filing, as required, all
promotional, sales or advertising material, whether developed by the
Wholesaler, the Companies or the Underwriter, with the NASD and any
federal and state securities, governmental or regulatory agencies.
The Companies shall be responsible for filing, as required, such
material, whether developed by the Wholesaler, the Companies or the
Underwriter, with any state insurance department.
13
<PAGE>
If any such promotional, sales or advertising material names the
Fund or the Fund's investment adviser, the Companies shall furnish
such material to the Fund or the Fund's distributor prior to its
use. Such material shall not be used unless written approval has
been obtained from the Fund or the Fund's distributor. Failure of
the Fund or the Fund's distributor to respond shall not relieve the
Companies or the Underwriter of the obligation to obtain the prior
written approval of the Fund or the Fund's distributor.
b. The Wholesaler acknowledges that the Company shall have the
unconditional right to reject, in whole or in part, any application
for a Contract. In the event an application is rejected, any premium
payments paid will be returned by or on behalf of the issuing insurer
to the applicant. AFLIAC or FAFLIC, as appropriate, will notify the
Wholesaler and the Broker-Dealer who submitted the premium payment of
such action. In the event that a purchaser exercises his/her free
look right under his/her Contract, any amount to be refunded as
provided in such Contract will be so refunded to the purchaser by or
on behalf of the issuing insurer. AFLIAC or FAFLIC, as appropriate,
will notify the Wholesaler and the Broker-Dealer who solicited the
sale of the Contract of such action.
c. The Wholesaler will pay the following expenses related to its
wholesaling activities contemplated by this Agreement:
(i) the compensation, if any, of its Associated Persons;
(ii) expenses associated with the initial licensing, if any, and
training of its Associated Persons involved in the wholesaling
activities;
(iii) expenses for design, development and printing of (1) marketing
kits and prospectus covers in a design which is agreed upon by
the Companies and the Wholesaler, which meet regulatory
requirements as determined by the Companies,
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and which are provided to the Companies in camera-ready format,
and (2) promotional and advertising materials;
(iv) expenses for design, development and printing of Contract and
Fund prospectuses and Contract semi-annual and annual reports;
(v) mailing of any promotional and advertising material and
marketing kits in connection with the distribution of the
Contracts;
(vi) fulfillment of marketing materials and forms to Broker-Dealers;
(vii) any additions, inserts, or packaging enhancements to the
Companies' basic "Welcome Package";
(viii) expenses associated with telecommunications with the Companies
at the sites of the Wholesaler or its Associated Persons,
including site installations and purchases, leases or rentals
of modems, terminals and other hardware, and lease line
telephone charges; and
(ix) any other expenses incurred by the Wholesaler or its Associated
Persons for the purpose of carrying out the obligations of the
Wholesaler hereunder.
Except for such expenses and the expenses described in Section 4.c.
of this Agreement, the Wholesaler shall not be responsible for
any expenses relating to the Contracts or distribution of the
Contracts or the processing of Contracts or applications, including
without limitation any expenses incurred in connection with
the return of premium payments solicited by Broker-Dealers for
applications rejected or not timely received by the Companies.
d. The Companies will pay all expenses in connection with:
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(i) the preparation and filing with appropriate governmental or
regulatory agencies of the Registration Statements and each
preliminary Prospectus and definitive Prospectus;
(ii) the preparation and issuance of the Contracts, including the
Companies' basic "Welcome Package" (any additions, inserts, or
packaging enhancements to the Companies' "Welcome Package" shall
be at the expense of the Wholesaler, as set forth in Section
4.c.vii, above);
(iii) any authorization, registration, qualification or approval of
the Contracts required under the securities, blue-sky laws or
insurance laws of any State;
(iv) registration fees for the Contracts payable to the SEC, the NASD
or any other governmental or regulatory agency;
(v) the mailing of Contract Prospectuses and any supplements
thereto, as required by federal securities laws, and periodic
reports relating to the Accounts to Contract owners;
(vi) the preparation and printing of administrative forms utilized in
connection with the distribution of the Contracts, including but
not limited to the form of application;
(vii) the preparation of Contract owner lists for the purposes of
proxy solicitations;
(viii) commissions and Promotional Allowances, as provided in Section 9
hereof; and
(ix) any other expenses related to the distribution of the Contracts
except those set forth in Section 4.c. and except as provided in
Section 4.e.
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e. The Companies alone shall be responsible for and bear the cost of
administration of the Contracts following their issuance, including
all Contract owner service and communication activities, but the
Wholesaler shall be responsible for answering inquiries from
Broker-Dealers or Representatives regarding the investment
performance of the Contracts, as permitted by applicable law.
f. The Companies, as agent for the Underwriter, will confirm to each
applicant for and owner of a Contract in accordance with Rule l0b-10
under the 1934 Act their acceptance of Purchase Payments and such
other transactions as are required by Rule l0b-10 or administrative
interpretations thereunder and in accordance with Release 8389 under
the 1934 Act.
g. The Wholesaler agrees to reimburse the Companies for Contract
development and implementation costs based upon the reimbursement
formula set forth in Schedule 5.
5. REPRESENTATIONS AND WARRANTIES
a. AFLIAC, FAFLIC and the Underwriter each represent and warrant to
the Wholesaler and each Wholesaler Agency Affiliate, on the
effective date of each Registration Statement for the Contracts (or
class of Contracts) and at each time that a Contract is sold and,
with respect to Clauses (vii), (viii), (xi), and (xii) below, and
also on the effective date of this Agreement, as follows:
(i) Each Registration Statement has been declared effective by the
SEC or has become effective in accordance with the Regulations.
(ii) Each Registration Statement and Prospectus comply in all
material respects with the provisions of the 1933 Act and the
1940 Act and the Regulations, and neither
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the Registration Statement nor the Prospectus contains an
untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, in light of the
circumstances in which they were made; PROVIDED, HOWEVER, that
none of the representations and warranties in this Clause (ii)
shall apply to statements in or omissions from the
Registration Statements or Prospectuses made in reliance upon
and in conformity with information furnished to the Companies
in writing by the Wholesaler expressly for use in the
Registration Statements.
(iii) Neither the Companies nor the Underwriter have received any
notice from the SEC with respect to the Registration
Statements or the Accounts supporting the Contracts described
in the Registration Statements pursuant to Section 8(e) of the
1940 Act and no stop order under the 1933 Act has been issued
and no proceeding therefor has been instituted or threatened
by the SEC.
(iv) The accountants who certified the financial statements included
in the Registration Statements and Prospectuses are independent
public accountants as required by the 1933 Act and the
Regulations.
(v) The financial statements included in the Registration Statements
present fairly the respective financial positions of the
Companies and the Accounts supporting the Contracts described in
the Registration Statements as of the dates indicated; and such
financial statements have been prepared in conformity with
generally accepted accounting principles in the United States
applied on a consistent basis.
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(vi) Subsequent to the respective dates as of which information is
given in the Registration Statements or the Prospectuses, there
has not been any material adverse change in the condition,
financial or otherwise, of the Companies, the Underwriter or the
Accounts supporting the Contracts described in the Registration
Statements that would cause such information to be materially
misleading.
(vii) AFLIAC has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of
Delaware and FAFLIC has been duly organized and is validly
existing as a corporation in good standing under the laws of
the Commonwealth of Massachusetts. AFLIAC and FAFLIC each has
full power and authority to own, lease and operate its
properties and conduct its business in the manner described in
the Prospectuses; is duly qualified to transact the business
of a life insurance company; and is in good standing, in each
State in which its Contracts are or will be offered.
(viii) The Underwriter has been duly organized and is validly
existing as a corporation in good standing under the laws of
the Commonwealth of Massachusetts with full power and
authority to own, lease and operate its properties and conduct
its business in the manner described in the Prospectuses; is
duly registered as a broker-dealer with the SEC and with the
securities commission of every State with which such
registration is required; and is a member in good standing
with the NASD.
(ix) Each Account supporting the Contracts described in the
Registration Statements has been duly authorized and
established and is validly existing as a separate account
under the insurance code of the State of Delaware (in the case
of AFLIAC) or the Commonwealth of Massachusetts (in the case
of FAFLIC), and is duly registered with the SEC as a unit
investment trust under the 1940 Act.
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(x) The forms of the Contracts have been approved to the extent
required by the Insurance Commissioner of the State of Delaware
(in the case of AFLIAC) or the Commonwealth of Massachusetts (in
the case of FAFLIC), and by the governmental agency responsible
for regulating insurance companies in each other State in which
the Contracts are to be offered.
(xi) The execution and delivery of this Agreement and the
consummation of the transactions contemplated in this
Agreement have been duly authorized by AFLIAC, FAFLIC and the
Underwriter and when so executed and delivered this Agreement
will be the valid and binding obligation of the Companies and
the Underwriter, enforceable in accordance with its terms.
(xii) The consummation of the transactions contemplated by this
Agreement, and the fulfillment of the terms of this Agreement,
will not conflict with, result in any breach of any of the
terms and provisions of, or constitute (with or without notice
or lapse of time) a default under, the charter or bylaws of
the Companies or the Underwriter, or any indenture, agreement,
mortgage, deed of trust, or other instrument to which AFLIAC,
FAFLIC or the Underwriter is a party or by which either is
bound, or violate any law, or, to the best of the Companies'
or the Underwriter's knowledge, any order, rule or regulation
applicable to AFLIAC, FAFLIC or the Underwriter of any court
or of any federal or state regulatory body, administrative
agency or any other governmental instrumentality having
jurisdiction over the Companies or the Underwriter or any of
their respective properties.
(xiii) No consent, approval, authorization or order of any court or
governmental authority or agency is required for the issuance or
sale of the Contracts or for the
20
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consummation of the transactions contemplated by this Agreement,
that has not been obtained.
(xiv) The Companies have filed with the SEC all statements and other
documents required for registration under the provisions of
the 1940 Act and the Regulations thereunder of the Accounts
supporting the Contracts described in the Registration
Statements, and such registration has been effected; there are
no agreements or documents required by the 1933 Act, the 1940
Act, or the Regulations to be filed with the SEC as exhibits
to the Registration Statements, that have not been so filed;
and the Companies have obtained all exemptive or other orders
of the SEC necessary to make the public offering and
consummate the sale of the Contracts pursuant to this
Agreement and to permit the operation of the Accounts
supporting the Contracts described in the Registration
Statements, as contemplated in the Prospectuses.
(xv) The Contracts have been duly authorized by the Companies and
conform to the descriptions thereof in the Registration
Statements and the Prospectuses and, when issued as contemplated
by the Registration Statements, will constitute legal, validly
issued and binding obligations of the Companies in accordance
with their terms.
b. The Wholesaler represents and warrants to the Companies and the
Underwriter on the effective date of this Agreement as follows:
(i) The Wholesaler has taken all actions including, without
limitation, those necessary under its articles of incorporation,
by-laws and applicable state corporate law, necessary to
authorize the execution, delivery and performance of this
Agreement and transactions contemplated hereunder; and
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(ii) The Wholesaler is, and during the terms of this Agreement
shall remain, duly registered as a broker-dealer under the
1934 Act, a member in good standing with the NASD, and duly
registered as a broker-dealer under applicable state
securities laws.
6. ADDITIONAL RESPONSIBILITIES OF THE COMPANIES
a. The Companies shall use their best efforts:
(i) to maintain the registration of the Contracts with the SEC and
any state securities commission of any State where the
securities or blue-sky laws of such State require registration
of the Contracts, including without limitation using their
best efforts to prevent a stop order from being issued or if a
stop order has been issued to cause such stop order to be
withdrawn;
(ii) to gain approval or other authorization of the Contract forms
where required under the insurance laws and regulations of
each State (PROVIDED, HOWEVER, that (A) it shall be within the
Companies' discretion whether to obtain such approval or
authorization in Guam, (B) AFLIAC Contracts shall be marketed
and offered for sale in all States except New York and Hawaii
and (C) FAFLIC Contracts shall only be marketed and offered
for sale in New York and Hawaii); and
(iii) to keep such registrations, approvals and authorizations in
effect thereafter so long as the Contracts are outstanding.
b. During the term of this Agreement the Companies shall take all action
required to cause each class of Contracts to comply, and to continue
to comply, as life insurance contracts, and to cause the
Registration Statement and the Prospectus for each class of Contracts
22
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to comply, and to continue to comply, with all applicable
federal laws and regulations and all applicable laws and
regulations of each State.
c. The Companies, during the term of this Agreement, shall notify the
Wholesaler immediately:
(i) when each Registration Statement has become effective or any
post-effective amendment with respect to the Registration
Statement thereafter becomes effective;
(ii) of any request by the SEC for any amendment to a Registration
Statement or supplement to a Prospectus or for additional
information;
(iii) of any event that makes any material statement made in a
Registration Statement or a Prospectus untrue in any material
respect or results in a material omission in a Registration
Statement or a Prospectus;
(iv) of the issuance by the SEC of any stop order with respect to a
Registration Statement or any amendment thereto, or the
initiation of any proceedings for that purpose, or for any other
purpose relating to the registration and/or offering of the
Contracts (or a class of Contracts);
(v) of those States where registration of the Contracts (or a class
of Contracts) is required under the securities or blue-sky laws,
and when such registrations have become effective.
d. The Companies shall timely file all reports, statements and
amendments required to be filed by or for each Account or class of
Contracts under the 1933 Act and/or the 1940 Act or the Regulations.
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e. AFLIAC and FAFLIC, as appropriate, each shall deliver to the
Wholesaler, as soon as practicable after it becomes available, its
Annual Statement and the Annual Statement for each of its Account(s)
in the form filed with its state of domicile, and any quarterly
reports upon the Wholesaler's request.
f. The Companies and the Underwriter will provide the Wholesaler access
to such records, officers and employees of the Companies, the
Underwriter and each Account at reasonable times as is necessary to
enable the Wholesaler to fulfill its obligations under the federal
securities laws and NASD rules. The Wholesaler will provide the
Companies and the Underwriter access to such of its records, officers
and employees at reasonable times as is necessary to enable the
Companies and the Underwriter to fulfill their obligations under the
federal securities laws and NASD rules.
7. CONFIDENTIALITY
a. The Companies and the Underwriter acknowledge that the names and
addresses of all customers and prospective customers (for purposes
of this Section 7.a., the terms "customers" and "prospective
customers" shall not mean Broker-Dealers) of the Wholesaler, and of
any affiliated person of the Wholesaler, the Wholesaler Agency
Affiliates and the names and addresses of all customers and
prospective customers of any Broker-Dealer that may come to the
attention of the Companies, the Underwriter or any person
affiliated with the Companies or the Underwriter solely as a result
of their relationship with the Wholesaler or any affiliated person
of the Wholesaler, the Wholesaler Agency Affiliates or any
Broker-Dealer and not from any independent source, are confidential
and shall not be used by the Companies, the Underwriter or any
person affiliated with the Companies or the Underwriter for any
purpose whatsoever except as may be necessary in connection with
the administration of the Contracts sold by the Broker-Dealers,
including responses to specific requests made to the Companies for
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service by Contract owners, efforts to prevent the replacement of
such Contracts or communications with customers concerning option
rights available under the terms of the Contracts. The restrictions
set forth in the previous sentence do not apply if and to the
extent a Broker-Dealer knowingly discloses the names and addresses
of its customers or prospective customers to AFLIAC, FAFLIC or the
Underwriter outside the operation of this Agreement. In no event
shall the names and addresses of such customers and prospective
customers, whether disclosed to the Companies or the Underwriter
by the Wholesaler or by any Broker-Dealer, be furnished by AFLIAC,
FAFLIC, the Underwriter or any of their affiliated persons to
any other person. The intent of this paragraph is that neither the
Companies nor the Underwriter, nor persons affiliated with the
Companies or the Underwriter, shall utilize, or permit to be
utilized, for any purpose other than for the sale and
administration of the Contracts, their knowledge of the Wholesaler
or of any affiliated person of the Wholesaler, the Wholesaler
Agency Affiliates or the identity of all customers and prospective
customers, derived solely as a result of the relationship created
through the funding and sale of the Contracts. This paragraph
shall remain operative and in full force and effect regardless of
the termination of this Agreement, and shall survive any such
termination.
8. RECORDS
AFLIAC, FAFLIC, the Underwriter, the Wholesaler and the Wholesaler
Agency Affiliates shall each maintain such accounts, books and other
documents as are required to be maintained by each of them by applicable
laws and regulations and shall preserve such accounts, books and other
documents for the periods prescribed by such laws and regulations. The
accounts, books and records of AFLIAC, FAFLIC, the Underwriter, the
Account, the Wholesaler and the Wholesaler Agency Affiliates as to all
transactions hereunder shall be maintained so as to clearly and
accurately disclose the nature and details of the transactions,
including such accounting information as is necessary to support the
reasonableness of the amounts paid by the Companies hereunder. Each
party shall have the right to inspect and audit such accounts, books and
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records of the other party during normal business hours upon reasonable
written notice to the other party. Each party shall keep confidential
all information obtained pursuant to such an inspection or audit, and
shall disclose such information to third parties only upon receipt of
written authorization from the other party, except as required by law.
9. BROKER-DEALER COMPENSATION AND WHOLESALER PROMOTIONAL ALLOWANCES
a. The Company shall compensate Broker-Dealers and/or their duly
licensed insurance affiliates for sales of the Contracts by their
Representatives pursuant to Schedule 4 to this Agreement, as such
Schedule may be amended from time to time upon mutual agreement of
the parties to this Agreement. Such compensation shall be based in
part on premium payments received and accepted by the Companies for
all Contracts issued on applications obtained by the Broker-Dealers
or any of their respective Representatives. Additional "trail"
compensation may be paid, as described in Schedule 4. The
Companies will pay compensation due Broker-Dealers and/or their
insurance affiliates in accordance with the procedures set forth in
Schedule 4. The compensation provided for in this Section 9 shall
be payable to the Broker-Dealer and/or its duly licensed insurance
affiliates in accordance with the sales agreement between the
Companies and/or the Underwriter and the Broker-Dealer for so long
as the Contracts are outstanding, regardless of whether this
Agreement is still in effect. In addition to the compensation
payable to the Broker-Dealers and their insurance affiliates, the
Companies shall pay the Wholesaler a Promotional Allowance as a
reimbursement for its expenses incurred relating to its wholesaling
activities contemplated by this Agreement. Promotional Allowances
shall be payable to the Wholesaler in such amount and in accordance
with the procedures as set forth in Schedule 4, as such Schedule
may be amended from time to time upon mutual agreement of the
parties to this Agreement. Promotional Allowances shall be payable
to the Wholesaler for so long as the Contracts are outstanding and
this Agreement remains in effect and not thereafter.
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If any State by insurance rule, regulation or statute, prohibits
payment of Promotional Allowances to the Wholesaler, the Wholesaler
shall designate in writing a business entity or natural person,
including Wholesaler Agency Affiliates, meeting the requirements of
such State to receive any amounts that may otherwise be payable to
the Wholesaler hereunder. The Wholesaler may change such
designation from time to time upon written notice to the Company.
Any payments made by the Companies to any person or entity so
designated by the Wholesaler shall discharge the Companies'
liability to the Wholesaler hereunder.
If a purchaser rescinds a Contract or exercises a right to
surrender a Contract for return of all premium payments, the
Wholesaler will pay to the Companies on demand the amount of any
Promotional Allowances it received on the premium payments
returned. Promotional Allowance charge backs will be calculated by
the Companies on the same basis, as described in Schedule 4 hereto,
as was utilized in calculating the Contract Promotional Allowances
received.
b. INDEBTEDNESS. Nothing in this Agreement shall be construed as giving
the Wholesaler the right to incur any indebtedness on behalf of
AFLIAC, FAFLIC or the Underwriter.
c. APPOINTMENT FEES. AFLIAC and FAFLIC, as appropriate, will pay the
initial and renewal fees for agent appointments by the respective
company of duly licensed Wholesaler Agency Affiliates and
Broker-Dealers and their respective Associated Persons; PROVIDED,
HOWEVER, that the Companies reserve the right to refuse to pay
renewal fees for Representatives not meeting such minimal sales
requirements as may be agreed upon from time to time.
d. REPORTING. The Wholesaler shall be responsible for all tax reporting
information, if any, that the Wholesaler is required to provide under
applicable tax law to its Associated Persons with respect to the
Contracts. Nothing contained in this Agreement or any sales
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agreement with a Broker-Dealer is to be construed to require the
Wholesaler to provide any tax reporting information directly or
indirectly to any Broker-Dealer or its Representatives.
10. INVESTIGATIONS AND PROCEEDINGS
a. AFLIAC, FAFLIC, the Underwriter and the Wholesaler will cooperate
fully in any securities, insurance, governmental or regulatory
investigation or proceeding or judicial proceeding arising out of
or in connection with the offering, sale or distribution of the
Contracts for which the Wholesaler acts as wholesaler pursuant to
this Agreement. Without limiting the foregoing, the Companies,
the Underwriter and the Wholesaler agree to notify one another
promptly of any customer complaint or notice of any governmental,
judicial or regulatory investigation or proceeding described in
this Section 10.
b. In the case of a substantive customer complaint, AFLIAC or FAFLIC,
as appropriate, the Underwriter, the Wholesaler and the Wholesaler
Agency Affiliates will cooperate in investigating such complaint
and any response by the issuing insurer or Underwriter, as one
party, or the Wholesaler or Wholesaler Agency Affiliates, as
another party, to such complaint will be sent to the other party
for approval not less than five business days prior to its being
sent to the customer or to any governmental or regulatory agency,
except that if a more prompt response is required, the proposed
response shall be communicated by telephone, telegraph or
facsimile. Neither such party will release any such response
without the other party's prior written approval, unless otherwise
required by applicable law. Failure of any party to object to a
proposed response within four business days shall be deemed to
constitute approval of a proposed response by the non-objecting
party.
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11. INDEMNIFICATION
a. AFLIAC, FAFLIC and the Underwriter, jointly and severally, shall
indemnify and hold harmless the Wholesaler and the Wholesaler
Agency Affiliates and each person who controls or is associated
with the Wholesaler or the Wholesaler Agency Affiliates within the
meaning of such terms under the federal securities laws, and any
officer, director, employee or agent of the foregoing, against any
and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of,
any action, suit or proceeding or any claim asserted), to which the
Wholesaler, the Wholesaler Agency Affiliates and/or such person may
become subject, under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any
Registration Statement, Prospectus, blue sky application or
other document executed by AFLIAC or FAFLIC specifically for
the purpose of qualifying any or all of the Contracts for sale
under the securities laws of any State, promotional, sales or
advertising material for the Contracts prepared by AFLIAC or
FAFLIC, or the Contracts themselves (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in
light of the circumstances in which they were made; PROVIDED
that this obligation to indemnify shall not apply if such
untrue statement or omission or such alleged untrue statement
or alleged omission was made in reliance upon and in
conformity with information furnished in writing to the
Companies or the Underwriter by the Wholesaler specifically
for use in the preparation of any such Registration Statement,
Prospectus or blue-sky application or other document, material
or Contract (or any such amendment or supplement thereto); or
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(ii) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Fund
Registration Statement, Fund Prospectus, blue sky application
or other document executed by the Fund specifically for the
purpose of qualifying any or all of the shares of the Fund for
sale under the securities laws of any State, or in any
promotional, sales or advertising material or written
information relating to the shares of the Fund authorized by
the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which
they were made, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and
in conformity with information furnished in writing to the
Wholesaler or the Fund by AFLIAC or FAFLIC specifically for
use in the preparation of any such Fund Registration
Statement, Fund Prospectus, blue-sky application or other
document (or any such amendment or supplement thereto); or
(iii) arise out of or are based upon any untrue statement or alleged
untrue statement or omission or alleged omission of a material
fact by or on behalf of AFLIAC, FAFLIC or the Underwriter
(other than statements or representations contained in a Fund
Registration Statement, Fund Prospectus or promotional, sales
or advertising material of the Fund that were not supplied by
the Companies, the Underwriter or persons under their control)
or wrongful conduct of the Companies or the Underwriter or
persons under their control with respect to the sale or
distribution of the Contracts; or
(iv) result because of the terms of any Contract or because of any
material breach by AFLIAC, FAFLIC or the Underwriter of any
terms of this Agreement or of any Contract or that proximately
result from any activities of the Companies' or Underwriter's
officers, directors, employees or agents or their failure to
take
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action in connection with the sale of a Contract, to the
extent of the Companies' or the Underwriter's obligations
under this Agreement or otherwise, or the processing or
administration of the Contracts.
This indemnification obligation will be in addition to any
liability that the Companies or Underwriter may otherwise have;
PROVIDED, HOWEVER, that no person shall be entitled to
indemnification pursuant to this Section 11.a. if such loss, claim,
damage or liability is due to the willful misfeasance, bad faith,
gross negligence or reckless disregard of duty by the person
seeking indemnification.
b. The Wholesaler shall indemnify and hold harmless AFLIAC, FAFLIC and
the Underwriter and each person who controls or is associated with
the Companies or the Underwriter within the meaning of such terms
under the federal securities laws and any officer, director,
employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which AFLIAC, FAFLIC,
the Underwriter and/or any such person may become subject under any
statute or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based
upon:
(i) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement, Prospectus or
blue-sky application or other document executed by AFLIAC or
FAFLIC specifically for the purpose of qualifying any or all
of the Contracts for sale under the securities laws of any
State (or any amendment or supplement to the foregoing), or
omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make
the statements therein not misleading, in light of the
circumstances in which they were made, in each case to the
extent, but only to the extent, that such untrue
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statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with
information furnished in writing to the Companies or the
Underwriter by the Wholesaler specifically for use in the
preparation of any such Registration Statement, Prospectus,
such blue-sky application or other document (or any such
amendment or supplement thereto); or
(ii) any use of promotional, sales or advertising material for the
Contracts not approved in writing by the Companies or any
verbal or written misrepresentations or any unlawful sales
practices concerning the Contracts by the Wholesaler or the
Wholesaler Agency Affiliates under federal securities laws or
NASD regulations (but not including state insurance laws,
compliance with which is a responsibility of the Companies or
the Underwriter under this Agreement or otherwise); or
(iii) claims by agents, representatives or employees of the Wholesaler
for compensation or other remuneration of any type; or
(iv) any material breach by the Wholesaler or the Wholesaler Agency
Affiliates of any provision of this Agreement.
This indemnification obligation will be in addition to any liability
that the Wholesaler may otherwise have; PROVIDED, HOWEVER, that no
person shall be entitled to indemnification pursuant to this Section
11.b. if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of
duty by the person seeking indemnification.
c. After receipt by a party entitled to indemnification ("indemnified
party") under this Section 11 of notice of the commencement of any
action, if a claim in respect thereof is to be made by the
indemnified party against any person obligated to provide
indemnification
32
<PAGE>
under this Section 11 ("indemnifying party"), such indemnified
party will notify the indemnifying party in writing of the
commencement thereof as soon as practicable thereafter, PROVIDED
THAT the omission to so notify the indemnifying party will not
relieve it from any liability under this Section 11, except to the
extent that the omission results in a failure of actual notice to
the indemnifying party and such indemnifying party is damaged as a
result of the failure to give such notice. The indemnifying party,
upon the request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any
such proceeding, any indemnified party shall have the right to
retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (ii) the named parties
to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests
between them. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent
but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnified party shall indemnify the
indemnified party from and against any loss or liability by reason
of such settlement or judgment.
d. The indemnification provisions contained in this Section 11 shall
remain operative in full force and effect, regardless of (i) any
investigation made by or on behalf of the Companies or by or on
behalf of any controlling person thereof, (ii) delivery of any
Contracts and premium payments therefor, or (iii) any termination
of this Agreement. A successor by law of the Wholesaler, AFLIAC,
FAFLIC or the Underwriter, as the case may be, shall be entitled to
the benefits of the indemnification provisions contained in this
Section 11.
33
<PAGE>
12. TERMINATION
a. This Agreement may be terminated at the option of any party upon six
months' advance written notice to the other parties.
b. This Agreement may not be assigned without the express written
consent of the other parties hereto. This Agreement may be
terminated at the option of the Companies and the Underwriter, as
one party, or the Wholesaler and the Wholesaler Agency Affiliates, as
one party, upon the other party's material breach of any provision of
this Agreement.
c. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except: (i) the obligation to settle accounts
hereunder, as set forth in Schedule 4; (ii) the provisions contained
in Sections 7 and 11 of this Agreement; and (iii) the indemnification
provisions set forth in Section 11 of this Agreement, or as otherwise
specifically noted in this Agreement.
34
<PAGE>
13. RIGHTS, REMEDIES, ETC, ARE CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties to this Agreement are
entitled to under state and federal laws. Failure of the Wholesaler or
the Wholesaler Agency Affiliates, as one party, or the Companies or the
Underwriter, as another party, to insist upon strict compliance by the
other party with any of the conditions of this Agreement shall not be
construed as a waiver of any of the conditions, but the same shall remain
in full force and effect. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a
continuing waiver.
14. NOTICES
All notices hereunder are to be made in writing and shall be given:
if to the Companies to:
Lila M. Weihs, Vice President
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
if to the Underwriter to:
Stephen Parker, President
Allmerica Investments, Inc.
440 Lincoln Street
Worcester, MA 01653
if to the Wholesaler or Wholesaler Agency Affiliates to:
Daniel J. O'Brien
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
35
<PAGE>
or such other address as such party may hereafter specify in
writing. Each such notice to a party shall be either hand
delivered or transmitted by registered or certified United States
mail with return receipt requested, and shall be effective upon
delivery.
15. INTERPRETATION, JURISDICTION, ETC.
This Agreement constitutes the whole agreement between the parties to this
Agreement relating to the wholesaling activities contemplated in this
Agreement, and supersedes all prior oral or written negotiations between
the parties to this Agreement with respect to the subject matter of this
Agreement. This Agreement shall be construed and the provisions of this
Agreement interpreted under and in accordance with the internal laws of
the Commonwealth of Massachusetts without giving effect to principles of
conflict of laws.
16. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement, or
the breach of this Agreement, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
17. HEADINGS
The headings in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions of this
Agreement or otherwise affect their construction or effect.
36
<PAGE>
18. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
19. SEVERABILITY
This is a severable agreement and in the event that any part or parts of
this Agreement shall be held to be unenforceable to its or their full
extent, then it is the intention of the parties to this Agreement that
such part or parts shall be enforced to the extent permitted under the
law, and, in any event, that all other parts of this Agreement shall
remain valid and duly enforceable as if the unenforceable part or parts
had never been a part of this Agreement.
20. REGULATION
This Agreement shall be subject to the provisions of the 1933 Act, 1934
Act and 1940 Act and the Regulations and the rules and regulations of
the NASD, from time to time in effect, including such exemptions from
the 1940 Act as the SEC may grant, and the terms of this Agreement shall
be interpreted and construed in accordance therewith.
37
<PAGE>
IN WITNESS WHEREOF, each party hereto represents that the officer signing
this Agreement on the party's behalf is duly authorized to execute this
Agreement; and each party has caused this Agreement to be duly executed by
such authorized officer on the date specified below.
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
Date: ____________________By: ________________________________________
Name:___________________________________
Title:__________________________________
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
Date: ____________________By: ________________________________________
Name:___________________________________
Title:__________________________________
ALLMERICA INVESTMENTS, INC.
Date: ____________________By: ________________________________________
Name:___________________________________
Title:__________________________________
DELAWARE DISTRIBUTORS, L.P.
Date: ____________________By: ________________________________________
Name:___________________________________
Title:__________________________________
38
<PAGE>
SCHEDULE 1
----------
WHOLESALER AGENCY AFFILIATES
NAME OF WHOLESALER AGENCY AFFILIATE STATE(S) IN WHICH LICENSED
None
<PAGE>
SCHEDULE 2
----------
SEPARATE ACCOUNTS
AVAILABLE UNDER THE CONTRACTS
- -------------------------------------------------------------------------------
Separate Account Subaccounts
Are Invested In The
Following Investment Portfolios
of the Delaware Group
Premium Fund, Inc.
Name of Separate Account
- -------------------------------------------------------------------------------
1. Group VEL Account of Allmerica Decatur Total Return Series
Financial Life Insurance and Devon Series
Annuity Company DelCap Series
Social Awareness Series
REIT Series
Small Cap Value Series
Trend Series
International Equity Series
Emerging Markets Series
Delaware Series
Delchester Series
Capital Reserves Series
Strategic Income Series
Cash Reserve Series
- -------------------------------------------------------------------------------
2. Group VEL Account of First Decatur Total Return Series
Allmerica Financial Life Devon Series
Insurance Company DelCap Series
Social Awareness Series
REIT Series
Small Cap Value Series
Trend Series
International Equity Series
Emerging Markets Series
Delaware Series
Delchester Series
Capital Reserves Series
Strategic Income Series
Cash Reserve Series
- -------------------------------------------------------------------------------
<PAGE>
SCHEDULE 3
----------
CONTRACTS SUBJECT TO WHOLESALING AGREEMENT
- -------------------------------------------------------------------------------
SEC
Policy Registration
Marketing Name Form Number Number
- -------------------------------------------------------------------------------
Group Vari-Exceptional
Life Plus (AFLIAC)* 1029-94 811-08704
- -------------------------------------------------------------------------------
Group Vari-Exceptional
Life Plus (FAFLIC)* 1029-94NY 811-7663
- -------------------------------------------------------------------------------
* This Wholesaling Agreement relates only to versions of the above
variable life insurance contracts that are funded with the Delaware
Group Premium Fund ("DGPF") Portfolios listed in Schedule 2. The
parties to this Agreement understand that the Companies market other
versions of such contracts that utilize funds other than DGPF
Portfolios and that this Agreement is not intended to cover such other
versions of such contracts.
<PAGE>
SCHEDULE 4
----------
BROKER-DEALER COMPENSATION AND
WHOLESALER PROMOTIONAL ALLOWANCE SCHEDULE
AFLIAC AND FAFLIC VARIABLE ANNUITY CONTRACTS
(A) The Companies will pay commissions to Broker-Dealers whose Registered
Representatives sell Group Vari-Exceptional Life Plus Contract
Certificates based on a commission schedule. Generally commissions shall
be paid as follows:
For Each Certificate Year
Percentage of Total Premiums Paid
---------------------------------
Premiums Paid Year 1: 9%
Premiums Paid Year 2
and thereafter: 4%
Trail*: .25%
Alternative commission schedules are also available for Contract
Certificate sales, based on premium payments and the level of enrollment and
ongoing administrative services provided by Broker-Dealers and their
Registered Representatives.
Commissions will only be paid to a Broker-Dealer while a Sales Agreement
between the Companies and/or the Underwriter and the Broker-Dealer
remains in force.
(B) While the Wholesaling Agreement remains in force, the Companies will pay
the Wholesaler Promotional Allowances. Promotional Allowances will be
paid to the Wholesaler no less frequently than twice a month and will be
equal to .08% (8 basis points) multiplied by Contract Certificate
premiums received and accepted by the Companies during the period for
which the payment is calculated.
* Trail commissions will be paid within 60 days following the end of each
calendar quarter. Quarterly trail commissions will be .0625% (1/4 of
.25%) of the unloaned value of each eligible Certificate. For purposes
of trail commission calculations, unloaned account value means the cash
value of a Certificate on the last day of the calendar quarter
immediately preceding the payment date less the principal of any
Certificate loan and accrued interest thereon. The first
trail commission for a Certificate will be paid on the first quarterly
payment date following the first anniversary of the date of issue of the
Certificate (e.g., if the Certificate is issued on March 1, 1999, the
first trail commission will be payable within 60 days of March 31,
2000). Trail commissions will continue to be paid while a Sales
Agreement between the Companies and/or the Underwriter and the
Broker-Dealer remains in force and will be paid on a particular
Certificate while the Certificate remains in force.
<PAGE>
SCHEDULE 5
----------
CONTRACT DEVELOPMENT AND IMPLEMENTATION
COST AND EXPENSE REIMBURSEMENT
The Wholesaler agrees to reimburse the Companies for Contract development and
implementation costs and expenses within 30 days following the end of the
Measurement Period, based on the following Schedule. For purposes of this
Schedule 5, the Measurement Period is the period of 24 calendar months
commencing with the first calendar month following the calendar month both
AFLIAC and FAFLIC Contracts are available for sale to the public, as
determined by the Companies.
Aggregate Premiums* Reimbursement
$0 to $5,000,000 $100,000
$5,000,001 to $10,000,000 $75,000
$10,000,001 to $15,000,000 $50,000
$15,000,001 to $20,000,000 $25,000
$20,000,001 and over $0
Notwithstanding the foregoing, no reimbursement shall be payable if aggregate
AFLIAC and FAFLIC first year premiums received and accepted by the Companies
during the last six months of the Measurement Period equal at least $9
million.
* Aggregate AFLIAC and FAFLIC first year and renewal premiums received and
accepted by the Companies prior to the end of the Measurement Period.
<PAGE>
Amendment to Schedules 1, 2 and 3 of the Participation Agreement
among
Delaware Group Premium Fund, Inc.
Delaware Distributors, Inc.
Allmerica Financial Life Insurance and Annuity Company
And
First Allmerica Financial Life Insurance Company
WHEREAS, Delaware Group Premium Fund, Inc., Delaware Distributors, Inc.,
Allmerica Financial Life Insurance and Annuity Company (formerly SMA Life
Assurance Company) and First Allmerica Financial Life Insurance Company
(formerly State Mutual Life Assurance Company of America) entered into a
Participation Agreement on December 23, 1991 ("Participation Agreement"); and
WHEREAS, the Participation Agreement provides for the amendment of Schedules
1, 2 and 3 thereto by mutual written consent of the parties from time to time
in accordance with the provisions of Article XI thereof, and the parties now
wish to amend and restate in their entirety Schedules 1, 2 and 3; and
NOW, THEREFORE, the parties do hereby agree:
1. To replace Schedules 1, 2 and 3 of the Participation Agreement and any
amendments thereto with the attached Schedules 1, 2 and 3 dated
October __, 1998.
2. All terms and conditions of the Participation Agreement and Schedules
thereto shall continue in full force and effect except as modified
hereby.
In witness whereof, each of the parties has caused this agreement to be
executed in its name and on its behalf by its duly authorized representatives
as of the date specified below.
DELAWARE DISTRIBUTORS, L.P.
DELAWARE GROUP PREMIUM FUND, INC. By: DELAWARE DISTRIBUTORS, INC.
(General Partner)
By: ________________________ By: ________________________
Name: Wayne A. Stork Name: David K. Downes
Title: Chairman Title: Executive Vice President,
Chief Operating Officer,
Chief Financial Officer
Date: ________________________ Date: ________________________
ALLMERICA FINANCIAL LIFE INSURANCE FIRST ALLMERICA FINANCIAL LIFE
AND ANNUITY COMPANY INSURANCE COMPANY
By: ________________________ By: ________________________
Name: Richard M. Reilly Name: Richard M. Reilly
Title: President Title: Vice President
Date: ________________________ Date: ________________________
<PAGE>
SCHEDULE 1
SEPARATE ACCOUNTS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
("AFLIAC") AND FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY ("FAFLIC")
INVESTING IN THE FUND
As of October __, 1998
Name of Account Date Established
- --------------- ----------------
Separate Account VA-K November 1, 1990
Of AFLIAC
Separate Account VEL June 3, 1987
Of AFLIAC
Separate Account VEL II January 21, 1993
Of AFLIAC
Separate Account VEL III June 13, 1996
Of AFLIAC
Separate Account Inheiritage September 15, 1993
Of AFLIAC
Fulcrum Separate Account June 13, 1996
Of AFLIAC
Fulcrum Variable Life Separate Account June 13, 1996
Of AFLIAC
Group VEL Separate Account May 1, 1995
Of AFLIAC
Separate Account VA-K August 20, 1991
Of FAFLIC
Separate Account VEL II August 20, 1991
Of FAFLIC
Separate Account VEL III June 13, 1996
Of FAFLIC
Separate Account Inheiritage August 20, 1991
Of FAFLIC
Fulcrum Separate Account June 13, 1996
Of FAFLIC
Group VEL Separate Account November 13, 1996
Of FAFLIC
<PAGE>
SCHEDULE 2
Variable Annuity Contracts
And Variable Life Insurance Policies
Supported by Separate Accounts
Listed on Schedule 1
As of October __, 1998
Allmerica Financial Life Insurance and Annuity Company
- ------------------------------------------------------
Individual Delaware Medallion Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware
Group Premium Fund, Inc.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL III Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL III and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage Variable Life Insurance Policies funded by
sub-accounts of Separate Account Inheiritage and investing in shares of the
International Equity Series of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of the
Fulcrum Separate Account and investing in shares of Delaware Group Premium
Fund, Inc.
Individual Fulcrum Variable Life Insurance Policies funded by sub-accounts of
Fulcrum Variable Life Separate Account and investing in shares of Delaware
Group Premium Fund, Inc.
First Allmerica Financial Life Insurance Company
- ------------------------------------------------
Individual Delaware Medallion Variable Annuity Contracts funded by
sub-accounts of Separate Account VA-K and investing in shares of Delaware
Group Premium Fund, Inc.
Individual ExecAnnuity Plus Variable Annuity Contracts funded by sub-accounts
of Separate Account VA-K and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL II Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL II and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual VEL III Variable Life Insurance Policies funded by sub-accounts of
Separate Account VEL III and investing in shares of the International Equity
Series of Delaware Group Premium Fund, Inc.
Individual Inheiritage Variable Life Insurance Policies funded by
sub-accounts of Separate Account Inheiritage and investing in shares of the
International Equity Series of Delaware Group Premium Fund, Inc.
Individual Fulcrum Variable Annuity Contracts funded by sub-accounts of the
Fulcrum Separate Account and investing in shares of Delaware Group Premium
Fund, Inc.
<PAGE>
SCHEDULE 3
Variable Contracts
Excluded from Section 1.8
As of October __, 1998
Allmerica Financial Life Insurance and Annuity Company
- ------------------------------------------------------
Individual Variable Annuity Contracts Marketed under the name "ExecAnnuity
Plus"
Individual Variable Annuity Contracts Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL"
Individual Variable Life Insurance Policies Marketed under the name "VEL Plus"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name "Estate
Optimizer"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Individual Variable Life Insurance Policies Marketed under the name "Fulcrum
Variable Life (SPVUL)"
Group Variable Life Insurance Policies Marketed under the name "Group VEL"
First Allmerica Financial Life Insurance Company
- ------------------------------------------------
Individual Variable Annuity Contracts Marketed under the name "ExecAnnuity
Plus"
Individual Variable Annuity Contracts Marketed under the name "Fulcrum"
Individual Variable Life Insurance Policies Marketed under the name "VEL II"
Individual Variable Life Insurance Policies Marketed under the name "Estate
Optimizer"
Individual Variable Life Insurance Policies Marketed under the name
"Inheiritage"
Group Variable Life Insurance Policies Marketed under the name "Group VEL"
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this th day of , 1998, by and
between Mutual Fund Variable Annuity Trust (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust and
Allmerica Financial Life Insurance and Annuity Company, a life insurance
company organized as a corporation under the laws of the State of Delaware
(the "Company"), on its own behalf and on behalf of each segregated asset
account of the Company set forth in Schedule A, as may be amended from time
to time (the "Accounts").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
has an effective registration statement relating to the offer and sale of the
various series of its shares under the Securities Act of 1933, as amended
(the "1933 Act");
WHEREAS, the Trust desires that Trust shares be used as an
investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements
with the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided
into the following series which are available for purchase by the Company for
the Accounts: Asset Allocation Portfolio, Capital Growth Portfolio, Growth
and Income Portfolio, International Equity Portfolio, Money Market Portfolio
and U.S. Government Income Portfolio (the "Portfolios");
WHEREAS, the Trust has received an order from the Commission, dated
September 4, 1997 (File No. 812-10680), granting Participating Insurance
Companies and their separate accounts exemptions from the provisions of
Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15)
and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of
the Portfolios of the Trust to be sold to and held by (i) variable annuity
and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies and (ii) qualified pension and
retirement plans ("Plans") as permitted by regulations and rulings of the
United States Department of Treasury (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933
Act certain variable life insurance policies and variable annuity contracts
to be issued by the Company under which the Portfolios are to be made
available as investment vehicles (the "Contracts");
<PAGE>
2
WHEREAS, the Company desires to use shares of one or more
Portfolios as investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the
parties agree as follows:
ARTICLE I.
Purchase and Redemption of Trust Portfolio Shares
1.1. Trust shares to be made available to the respective Accounts
shall be sold by each of the respective Portfolios of the Trust and purchased
by the Company for that Account at the net asset value next computed after
receipt of each order, as established in accordance with the provisions of
the then current prospectus of the Trust. Shares of a particular Portfolio
of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of those
Contracts having amounts allocated to the Account (or subaccount thereof) for
which the Trust Portfolio shares serve as the underlying investment medium.
Orders and payments for shares purchased will be sent promptly to the Trust
and will be made payable in the manner established from time to time by the
Trust for the receipt of such payments. The Trust has the obligation to
ensure that its shares to be made available to the appropriate Accounts are
registered at all times under the 1933 Act.
1.2. The Trust will redeem the shares of the various Portfolios
when requested by the Company on behalf of the corresponding Accounts at the
net asset value next computed after receipt of each request for redemption,
as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust will make payment in the manner
established from time to time by the Trust for the receipt of such redemption
requests, but in no event shall payment be delayed for a greater period than
is permitted by the 1940 Act. The Trust reserves the right to suspend the
right of redemption, consistent with Section 22(e) of the 1940 Act and any
rules thereunder.
1.3. For purposes of Sections 1.1 and 1.2 above, the Company shall
be the agent of the Trust for the receipt of (i) orders to purchase, and (ii)
requests to redeem shares of the Portfolios of the Trust on behalf of the
Accounts, the receipt of such orders and requests by such agent shall
constitute receipt thereof by the Trust, provided that the Trust receives
actual notice of such order or request by 9:30 a.m. (at the Trust's offices)
on the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange (and, with respect to the Money Market
Portfolio, the New York Stock Exchange and the Federal Reserve Bank of New
York) is open for trading and on which the Trust calculates its net asset
value pursuant to the rules of the Commission and the Trust's currently
effective registration statement.
<PAGE>
3
1.4. Issuance and transfer of the Trust's Portfolio shares will be
by book entry only. Stock certificates will not be issued to the Company or
the Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of each
Account.
1.5. The Trust shall furnish same day notice to the Company of any
dividend or distribution payable on the shares of any Portfolio of the Trust
held by an Account. The Company hereby elects to receive all such income
dividends and capital gain distributions as are payable on a Portfolio's
shares in additional shares of that Portfolio. The Trust shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.6. The Trust shall calculate the net asset value of each
Portfolio on each Business Day, as defined in Section 1.3. The Trust shall
make the net asset value per share for each Portfolio available to the
Company or its designated agent on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available to the Company
by 6:00 p.m. Eastern time each Business Day.
1.7. The Trust agrees that its Portfolio shares will be sold only
to Participating Insurance Companies and their segregated asset accounts and
to such other entities, including qualified pension and retirement plans, as
may be permitted by Section 817(h) of the Code, the regulations hereunder, or
judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public.
1.8. The Trust agrees that all Participating Insurance Companies
shall have the obligations and responsibilities regarding pass-through voting
and conflicts of interest corresponding materially to those contained in
Article III and Article V of this Agreement.
ARTICLE II.
Registration Statements, Sales Material
and Other Information
2.1. At least annually, the Trust shall provide the Company copies
of its prospectus in such quantities as the Company and the distributor for
the Accounts' shall reasonably require for distribution to Contract Owners
and prospective Contract Owners. Copies of prospectuses for distribution to
existing Contract owners shall be provided to the Company at the Trust's
expense. At the request of the Company, the Trust or its designee shall
provide the Company, free of charge, with camera ready copy of the Trust's
new prospectus as set in type, or as a
<PAGE>
4
diskette in the form sent to a financial printer, and other assistance as is
reasonably necessary in order for the parties hereto once each year (or more
frequently if the prospectus for the Trust is supplemented or amended) to
have the prospectus for the Contracts and the prospectus for the shares
printed together in one document. The Trust or its designee shall bear the
cost of printing and of mailing the Trust's prospectus portion of such
Contracts, and the Company shall bear the expenses of printing Contracts;
PROVIDED, HOWEVER, that the Company shall bear all printing expenses of such
combined document where used for distribution to prospective purchasers.
The Trust's prospectus shall state that the current Statement of Additional
Information ("SAI") for the Trust is available from the Trust or its
designee, and the Trust, at its expense, shall print, or otherwise reproduce,
and provide a copy of such SAI free of charge to the Company for itself and
for any Contract owner who requests such SAI.
The Trust, at its expense, shall provide the Company with copies of its proxy
material, reports to shareholders, and other communications to shareholders
in such quantity as the Company shall reasonably require for distribution to
Contract owners. The Trust or its designee shall bear the cost for such
documents used for such purposes other than distribution to current Contract
owners.
2.2 The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust
in connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Trust shares, as such documents may be amended or supplemented from time to
time, or in reports or proxy statements for the Trust, or in sales literature
or other promotional material approved by the Trust, except with the
permission of the Trust.
2.3 The Trust shall not give any information or make any
representations on behalf of the Company or concerning the Company, the
Accounts or the Contracts other than the information or representations
contained in the registration statement or prospectus for the Contracts, as
such registration statement and prospectus may be amended or supplemented
from time to time, or in published rpeorts for the Accounts which are in the
public domain or approved by the Company for distribution to Contract owners,
or in sales literature or other promotional material approved by the Company,
except with the permission of the Company.
<PAGE>
5
2.4 The Trust will provide to the Company at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above that relate to the Trust or
its shares, contemporaneously with, or promptly after, the filing of such
document with the Commission or other regulatory authorities.
2.5. The Company will provide to the Trust at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, request for
no-action letters, and all amendments to any of the above, that relate to the
Contracts or the Accounts, contemporaneously with, or promptly after, the
filing of such document with the Commission or other regulatory authorities.
2.6. For purposes of this Article II, the phrase "sales literature
or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, the
Internet or other public media), sales literature (i.e., any written
communication distributed or made generally available to customers or the
public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published articles), educational or training materials
or other communications distributed or made generally available to some or
all agents or employees, and registration statements, prospectuses,
Statements of Additional Information, shareholder reports, and proxy
materials.
2.7. The Company agrees and acknowledges that the Trust is an owner
of the name and mark "Vista" and that all use of any designation comprised
in whole or part of such name or mark under this Agreement shall inure to the
benefit of the Trust. The Company shall not use any such name or mark on its
own behalf or on behalf of the Accounts or Contracts in any registration
statement, advertisement, sales literature or other materials relating to the
Accounts or Contracts without the prior written consent of the Trust. Upon
termination of this Agreement for any reason, the Company shall cease all use
of any such name or mark as soon as reasonably practicable.
2.8. The Company shall not bear any of the expenses of the cost of
registration and qualification of the Trust shares under Federal and any
state securities law, preparation and filing of the Trust Prospectus and the
Trust Registration
<PAGE>
6
Statement, Trust proxy materials and reports, setting the Trust Prospectus in
type, setting in type and printing and distributing the Trust proxy materials
and reports to shareholders (including the costs of printing a prospectus
that constitutes an annual report), the preparation of all statements and
notices required by any Federal or state securities law, all taxes on the
issuance or transfer of Trust shares, and any expenses permitted to be paid
or assumed by the Trust pursuant to a plan, if any, under Rule 12b-l under
the 1940 Act.
ARTICLE III.
VOTING
3.1. So long as, and to the extent that, the Commission interprets
the 1940 Act to require pass-through voting privileges for Contract owners,
the Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in shares of
one or more Portfolios of the Trust. The Trust shall require all
Participating Insurance Companies to calculate voting privileges in the same
manner and the Company shall be responsible for assuring that the Accounts
calculate voting privileges in the manner established by the Trust. With
respect to each registered Account, the Company will vote shares of each
Portfolio of the Trust held by a registered Account and for which no timely
voting instructions from Contract owners are received in the same proportion
as those shares for which voting instructions are received. With respect to
each Account, the Company will vote shares of each Portfolio of the Trust
held by the Company in its own behalf or on behalf of such Account that are
not attributable to Contract owners in the same proportion as those shares
for which voting instructions are received. The Company and its agents will
in no way recommend or oppose or interfere with the solicitation of proxies
for Portfolio shares held to fund the Contacts without the prior written
consent of the Trust, which consent may be withheld in the Trust's sole
discretion.
ARTICLE IV.
Representations and Warranties
4.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act and have been duly authorized for
issuance. The Company further represents and warrants that the Contracts
will be issued and sold in compliance in all material respects with all
applicable federal and state laws; and the Company will require all persons
involved in the sale of the Contracts to comply in all material respects with
any applicable investor suitability requirements under state insurance laws.
4.2. The Company represents and warrants that it is an insurance
company duly organized and in good standing under the
<PAGE>
7
laws of the State of Delaware and that it has legally and validly established
each Account prior to any issuance or sale of the Contracts as a segregated
asset account under such law and has registered or, prior to any issuance or
sale of the Contracts, will register the Accounts as unit investment trusts
in accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts and that the Accounts will comply in all
material respects with the 1940 Act, and that Allmerica Investments, Inc.,
the principal underwriter for the Contracts, is registered and will remain
registered during the term of this Agreement as a broker-dealer under the
Securities Exchange Act of 1934 and will remain during the term of this
Agreement a member in good standing of the National Association of Securities
Dealers, Inc.
4.3. The Trust represents and warrants that Trust shares sold
through this Agreement shall be registered under the 1933 Act, shall be duly
authorized for issuance and sold in compliance with all applicable federal
and state securities laws and that the Trust is and shall remain registered
under the 1940 Act. The Trust shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Trust represents
that it is lawfully organized and validly existing as a business Trust under
the laws of the Commonwealth of Massachusetts and that it does and will
comply in all material respects with the 1940 Act.
4.4. The Trust represents and warrants that it will at all times be
operated and managed (a) in compliance with all applicable federal and state
laws; (b) in compliance with the policies and procedures of the Trust and in
compliance with the objectives, policies and limitations for the Portfolio(s)
set forth in the Trust's current prospectus and statement of additional
information; and (c) to minimize any taxes and/or penalties payable by the
Trust or such Portfolio.
4.5. The Trust represents and warrants that the investments of each
Portfolio currently and will continue to comply with the diversification
requirements for variable annuity, endowment or life insurance contracts set
forth in Section 817(h) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the rules and regulations thereunder, including without
limitation Treasury Regulation 1.817-5, and the Trust will notify the Company
immediately upon having a reasonable basis for believing any Portfolio has
ceased to comply or might not so comply and will immediately take all
reasonable steps to adequately diversify the Portfolio to achieve compliance
within the grace period afforded by Regulation 1.817-5.
4.6. The Trust represents and warrants that it is currently qualified
as a "regulated investment company" under Subchapter M of the Code, that it will
make every effort to
<PAGE>
8
maintain such qualification and will notify the Company immediately upon
having a reasonable basis for believing it has ceased to so qualify or might
not so qualify in the future.
4.7. The Trust represents and warrants that all of its Trustees,
officers, employees, investment advisers, and other persons dealing with the
money or securities of the Trust are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Trust in an amount not less than the minimal coverage as required currently
by Section 17(g) of the 1940 Act or related provisions as may be promulgated
from time to time. The aforesaid bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
ARTICLE V.
Potential Conflicts
5.1. The parties acknowledge that a Portfolio's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. A material irreconcilable conflict may
arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative
or judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity Contract owners, variable life
insurance Contract owners and trustees of Plans; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
Contract owners; or (g) if applicable, a decision by a Plan to disregard
voting instructions of Plan participants. The Trust shall promptly inform
the Company in writing of any determination by the Trustees that a material
irreconcilable conflict exists and of the implications thereof.
5.2. The Company agrees to report promptly any potential or
existing conflicts of which it is aware to the Trustees. The Company will
assist the Trustees in carrying out their responsibilities under the Shared
Funding Exemptive Order by providing the Trustees with all information
reasonably necessary for and requested by the Trustees to consider any issues
raised including, but not limited to, information as to a decision by the
Company to disregard Contract owner voting instructions. All communications
from the Company to the Trustees may be made in care of the Trust.
<PAGE>
9
5.3. If it is determined by a majority of the Trustees, or a
majority of the disinterested Trustees, that a material irreconcilable
conflict exists that affects the interests of Contract owners, the Company
shall, in cooperation with other Participating Insurance Companies whose
Contract owners are also affected, at its own expense and to the extent
reasonably practicable (as determined by the Trustees) take whatever steps
are necessary to remedy or eliminate the material irreconcilable conflict,
which steps could include: (a) withdrawing the assets allocable to some or
all of the Accounts from the Trust or any Portfolio and reinvesting such
assets in a different investment medium, including (but not limited to)
another Portfolio of the Trust, or submitting the question of whether or not
such segregation should be implemented to a vote of all affected Contract
owners and, as appropriate, segregating the assets of any appropriate group
(i.e., variable annuity Contract owners or variable life insurance Contract
owners of one or more Participating Insurance Companies) that votes in favor
of such segregation, or offering to the affected Contract owners the option
of making such a change; and (b) establishing a new registered management
investment company or managed separate account.
5.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees. Any such withdrawal and termination must take place within six (6)
months after the Trust gives written notice that this provision is being
implemented. Until the end of such six (6) month period, the Trust may, if
appropriate, continue to accept and implement orders by the Company for the
redemption of shares of the Trust.
5.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined that
such decision has created a material irreconcilable conflict; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing material irreconcilable conflict as determined by a
majority of the disinterested Trustees. Until the end of such six (6) month
period, the Trust may, if appropriate, continue to
<PAGE>
10
accept and implement orders by the Company for the redemption of shares of
the Trust.
5.6. For purposes of Section 5.3 through 5.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no
event will the Trust be required to establish a new funding medium for any
Contract. The Company shall not be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote of a
majority of Contract owners materially adversely affected by the material
irreconcilable conflict. In the event that the Trustees determine that any
proposed action does not adequately remedy any material irreconcilable
conflict, then the Company will withdraw the Account's investment in the
Trust and terminate this Agreement within six (6) months after the Trustees
inform the Company in writing of the foregoing determination; provided,
however, that such withdrawal and termination shall be limited to the extent
required by any such material irreconcilable conflict as determined by a
majority of the disinterested Trustees.
5.7. The Company shall at least annually submit to the Trustees
such reports, materials or data as the Trustees may reasonably request so
that the Trustees may fully carry out the duties imposed upon them by the
Shared Funding Exemptive Order, and said reports, materials and data shall be
submitted more frequently if deemed appropriate by the Trustees.
5.8. If and to the extent that Rule 6e-3(T) is amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then the Trust and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rule
6e-3(T), as amended, or Rule 6e-3, as adopted, to the extent such rules are
applicable.
ARTICLE VI.
Indemnification
6.1. The Company agrees to indemnify and hold harmless the Trust
and each of its Trustees and officers and each person, if any, who controls
the Trust within the meaning of Section 15 of the 1933 Act against any and
all losses, claims, damages, liabilities or litigation (including reasonable
legal and other expenses) to which the Trust or such Trustees, officers or
controlling person may become subject under the 1933 Act, under any other
statute, at common law or otherwise, arising out of the acquisition of the
Contracts by any person which (i) may be based upon any breach of this
Agreement by the Company, any of its
<PAGE>
11
employees or representatives (other than an insurance agent), (ii) may be
based upon a breach of the representations and warranties made by the Company
in this Agreement, (iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering the Contracts, or any amendment or supplement thereto, or
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Trust, or (iv) may be based
on any untrue statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering the Trust, or
any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to the Trust by or
on behalf of the Company; provided, however, that in no case (a) is the
Company's indemnity in favor of a Trustee or officer or any other person
deemed to protect such Trustee or officer or other person against any
liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
or her duties or by reason of his or her reckless disregard of obligations
and duties under this Agreement, or (b) is the Company to be liable under its
indemnity agreement contained in this Section 6.1 with respect to any claim
made against the Trust or any person indemnified unless the Trust or such
person, as the case may be, shall have notified the Company in writing
pursuant to Article VIII of this Agreement within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Trust or upon such other person (or
after the Trust or such person shall have received notice of such service on
any designated agent), but failure to notify the Company of any such claim
shall not relieve the Company from any liability which it may have to the
Trust or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this Section 6.1. The Company
shall be entitled to participate, at its own expense, in the defense, or, if
it so elects, to assume the defense of any suit which could result in
liability to it under this Section 6.1, but if the Company elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
reasonably satisfactory to the Trust and to such of its officers, Trustees
and controlling person or persons as may be defendants in the suit. In the
event that the Company elects to assume the defense of any such suit and
retain such counsel, the Trust, such officers, Trustees and controlling
person or persons shall bear the fees and expenses of any additional counsel
retained by them, but, in the case the Company does not elect to assume the
defense of any such suit, the Company will reimburse the Trust, such
officers, Trustees and controlling person or persons for the reasonable
<PAGE>
12
fees and expenses of any counsel retained by them. The Trust agrees promptly
to notify the Company pursuant to Article VIII of this Agreement of the
commencement of any litigation or proceedings against it or its officers or
Trustees in connection with the issue and sale of any Contracts.
6.2. The Trust agrees to indemnify and hold harmless the Company
and its affiliates and each of their Directors and officers and each person,
if any, who controls the Company within the meaning of Section 15 of the 1933
Act against any and all losses, claims, damages, liabilities or litigation
(including reasonable legal and other expenses) to which it or such
Directors, officers or controlling person may become subject under the 1933
Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any shares of the Trust by any person which (i) may be based
upon any breach of this Agreement by the Trust or any of its employees or
representatives, (ii) may be based upon any breach of the representations and
warranties made by the Trust in this Agreement, (iii) may be based upon any
untrue statement or alleged untrue statement of a material fact contained in
a registration statement or prospectus covering shares of the Trust or any
amendment thereof or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, unless such statement or
omission was made in reliance upon information furnished to the Trust by the
Company, or (iv) may be based on any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or
prospectus covering the Contracts, or any amendment or supplement thereto, or
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or statements therein
not misleading, if such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the Trust; provided,
however, that in no case (a) is the Trust's indemnity in favor of a Director
or officer or any other person deemed to protect such Director or officer or
other person against any liability to which any such person would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence
in the performance of his or her duties or by reason of his or her reckless
disregard of obligations and duties under this Agreent or (b) is the Trust to
be liable under its indemnity agreement contained in this Section 6.2 with
respect to any claims made against the Company or such person indemnified
unless the Company or such person, as the case may be, shall have notified
the Trust in writing pursuant to Article VIII of this Agreement within a
reasonable time after the sununons or the first legal process giving
information of the nature of the claim shall have been served upon the
Company or such other person (or after the Company or such person shall have
received notice of such service on any designated agent), but failure to
notify the Trust of any claim shall not relieve it from any liability which
it may
<PAGE>
13
have to the Company or any person against whom such action is brought
otherwise than on account of its indemnity agreement contained in this
Section 6.2. The Trust will be entitled to participate, at its own expense,
in the defense, or, if it so elects, to assume the defense of any suit which
could result in liability to it under this Section 6.2, but if the Trust
elects to assume the defense, such defense shall be conducted by counsel
chosen by it and reasonably satisfactory to the Company and to such of its
Directors, officers and controlling person or persons as may be defendants in
the suit. In the event that the Trust elects to assume the defense of any
such suit and retain such counsel, the Company, such Directors, officers and
controlling person or persons shall bear the fees and expenses of any
additional counsel retained by them, but, in the case the Trust does not
elect to assume the defense of any such suit, the Trust will reimburse the
Company, such Directors, officers and controlling person or persons for the
reasonable fees and expenses of any counsel retained by them. The Company
agrees promptly to notify the Trust pursuant to Article VIII of this
Agreement of the commencement of any litigation or proceedings against it or
any of its officers or Directors in connection with the issue and sale of any
shares of the Trust.
ARTICLE VII.
Termination
7.1. This Agreement shall terminate:
(a) by mutual written consent of the Company and the
Trust;
(b) at the option of any party upon 60 days advance written notice
to the other parties, unless a shorter time is agreed to by the parties;
(c) at the option of the Trust if the Contracts issued by the
Company cease to qualify as annuity contracts or life insurance contracts,
as applicable, under the Code or if the Contracts are not registered,
issued or sold in accordance with applicable state and/or federal law; or
(d) at the option of any party upon a determination by a majority
of the Trustees of the Trust, or a majority of its disinterested Trustees,
that a material irreconcilable conflict exists; or
(e) at the option of the Company upon institution of formal
proceedings against the Trust by the Commission or any other regulatory
body; or
(f) at the option of the Trust upon institution of formal
proceedings against the Company or with respect to
<PAGE>
14
the Accounts by the Commission or any other regulatory body; or
(g) at the option of the Company if the Trust or a Portfolio fails
to meet the diversification requirements specified in Section 4.5 hereof;
or
(h) at the option of the Company if shares of any of the Portfolios
are not reasonably available to meet the requirements of the Contracts
funded in the Accounts, as determined by the Company; or
(i) at the option of the Company in the event any of the shares of
the Portfolios are not registered, issued or sold in accordance with
applicable state and/or federal law, or such law precludes the use of such
shares as the underlying investment media of the Contracts; provided,
however, that such termination shall only affect this Agreement's
applicability to such Portfolio; or
(j) at the option of the Company, if any Portfolio fails to qualify
as a Regulated Investment Company under Subchapter M of the Code or under
any successor or similar provision; or
(k) upon the vote of the Contract owners having an interest in the
Accounts (or any subaccounts) to substitute the shares of another
investment company for the corresponding Trust shares in accordance with
the terms of the Contracts for which the Trust shares had been selected to
serve as the underlying investment media. The Company will give thirty
(30) days' prior written notice to the Trust of the date of any proposed
vote or other action taken to replace the Trust's shares; or
(l) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement; or
(m) at the option of the Trust, without payment of any amount, for
cause on not less than 60 days' prior written notice to the Company,
unless such cause has been cured within 30 days of receiving such notice,
for any one of the following reasons:
(i) the acquisition of more than 50% of the common stock, par
value $1.00 per share, of First Allmerica Financial Life
Insurance Company by a national bank holding company (as such
term is defined under the Bank Holding Company Act) or an asset
management company which acts as an investment adviser with
respect to mutual funds aggregating more than $15 billion in
assets (in
<PAGE>
15
each case where such entity is not controlled by of First
Allmerica Financial Life Insurance Company prior to such
acquisition);
(ii) other than as required by law, a material change in, or
other material revision to the Contracts not previously accepted
in writing by the Trust's investment adviser; or
(iii) any material suspension or withdrawal, or revision
downward, of the Company's published claims paying ratings below
"A-" (or in the case of Moody's Investor Services, below Baa3)
by (A) any two of the following rating agencies: Standard &
Poor's Corporation, Duff & Phelps and Best's Insurance Reports
and (B) Moody's Investor Services.
Prompt notice shall be given by each party to all other parties in
the event that the conditions stated in subsections (c), (d), (e), (f), (g),
(h), (i), (j), (l) or (m) of this Section 7.1 should occur.
7.2. Notwithstanding any termination of this Agreement under
Section 7.1 other than a termination under Section 7.1(d), the Trust shall,
at the option of the Company, continue to make available additional shares of
the Trust pursuant to the terms and conditions of this Agreement for all
Contracts in effect on the effective date of termination of this Agreement
(hereinafter referred to as "Existing Contracts") for a period of at least 2
years. The owners of the Existing Contracts shall be permitted to reallocate
investments in the Trust, redeem investments in the Fund or invest in the
Trust upon the making of additional purchase payments under the Existing
Contracts.
7.3. Notwithstanding any termination of this Agreement under
Section 7.1, the provisions of Sections 6.1 and 6.2 (Indemnification) shall
survive any termination of this Agreement, and the provisions of Article III
and Article V shall survive the termination of this Agreement as long as
shares of the Trust are held on behalf of Contract owners in accordance with
Section 7.2.
ARTICLE VIII.
Notices
Any notice shall be sufficiently given when sent by registered or
certified mail, postage prepaid, return receipt requested, or by nationally
recognized overnight courier, charges prepaid with evidence of delivery to the
other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party, and such notice shall be effective upon delivery.
<PAGE>
16
If to the Trust or its Distributor:
Vista Fund Distributors, Inc.
One Chase Manhattan Plaza
New York, NY 10081
Attn: Secretary, Vista Family of Mutual Funds
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Sheila St. Hilaire
ARTICLE IX.
Miscellaneous
9.1. The Company acknowledges the following limitation of liability:
The terms "Mutual Fund Variable Annuity Trust" and "Trustees of
Mutual Fund Variable Annuity Trust" refer, respectively, to the trust created
and the Trustees, as trustees but not individually or personally, acting from
time to time under the Declaration of Trust, to which reference is hereby
made and a copy of which is on file at the office of the Secretary of State
of the State of Massachusetts, such reference being inclusive of any and all
amendments thereto so filed or hereafter filed. The obligations of "Mutual
Fund Variable Annuity Trust" entered into in the name or on behalf thereof by
any of the Trustees, representatives or agents are made not individually, but
in such capacities and are not binding upon any of the Trustees, shareholders
or representatives of the Trust personally, but bind only the assets of the
Trust, and all persons dealing with the Trust or a Portfolio must look solely
to the assets of the Trust or Portfolio for the enforcement of any claims
against the Trust or Portfolio.
9.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
9.3. This Agreement may be executed in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
9.4. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
<PAGE>
17
9.5. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
It shall also be subject to the provisions of the federal securities laws and
the rules and regulations thereunder and to any orders of the Commission
granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
9.6. Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Commission, the NASD and state insurance regulators) and shall permit such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
9.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies
and obligations, at law or in equity, which the parties herto are entitled to
under state and federal laws.
9.8. This Agreement shall not be exclusive in any respect.
9.9. Neither this Agreement nor any rights or obligations
hereunder may be assigned by either party without the prior written approval
of the other party.
9.10. No provisions of this Agreement may be amended or modified
in any manner except by a written agreement properly authorized and executed
by both parties.
9.11. Each party hereto shall, except as required by law or
otherwise permitted by this Agreement, treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto, and shall
not disclose such confidential information without the written consent of the
affected party unless such information has become publicly available.
<PAGE>
18
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year
first above written.
MUTUAL FUND VARIABLE ANNUITY TRUST
By: /s/
------------------------
Name:
Title:
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/
------------------------
Name:
Title:
<PAGE>
SCHEDULE A
To
PARTICIPATION AGREEMENT
Between
MUTUAL FUND VARIABLE ANNUITY TRUST
and
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
The segregated asset accounts of First Allmerica Financial Life
Insurance Company that are included under this Participation Agreement are:
The Group VEL Account, established November 22, 1993.
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND SUPPLEMENT TO ENROLLMENT FORM
ANNUITY COMPANY FOR GROUP FLEXIBLE PREMIUM
440 Lincoln Street - Worcester, MA 01653 VARIABLE LIFE INSURANCE
Print clearly in black ink
Proposed Insured ______________________________________________________________
1. ALLOCATION OF NET PREMIUM
The Payor Option is elected if the Payor's name and address are listed below:
_______________________________________
_______________________________________
_______________________________________
I direct that the Company mail all premium notices to the Payor while the
Payor Option is in effect. The premium notices will include the insurance
charges and administrative charges to be paid by me and the Payor. The net
premiums paid for administrative charges and insurance charges shall be
allocated to a portion of the Allmerica Insvestment Trust Money Market Fund
(called the "monthly deduction sub-account") while the Payor Option is in
effect.
(NOTE: Please indicate below how the net premium not allocated to the
"monthly deduction sub-account" will be allocated to the General Account and
appropriate sub-accounts of the Variable Account. This allocation shall apply
to the entire net premium if the Payor Option is not elected. WHOLE
PERCENTAGES MUST TOTAL 100%. Please refer to the Prospectuses for a
definition of "net premium" and for information about the General Account
and other sub-accounts of the Variable Account.)
Investment OptionsInvestment Objective
___________% Allmerica Select Aggressive Growth Fund
___________% Allmerica Select Capital Appreciation Fund
___________% Allmerica Select Value Opportunity Fund
___________% T. Rowe Price International Stock Portfolio
___________% Vista International Equity Portfolio
___________% Delaware International Equity Series Fund
___________% Allmerica Select Growth Fund
___________% Vista Capital Growth Portfolio
___________% Vista Growth & Income Portfolio
___________% Allmerica Equity Index Fund
___________% Vista Asset Allocation Portfolio
___________% Vista U.S. Government Income Portfolio
___________% Allmerica Investment Grade Income Fund
___________% Allmerica Money Market Fund
___________% General Account
___________% ___________________________________________
___________% ___________________________________________
___________% ___________________________________________
100 Total (Whole percentages. Must total 100%.)
I understand that funds may be deposited to a maximum of fourteen
sub-accounts. All net payments will be allocated to the Allmerica Money
Market Fund unless I specify otherwise.
(Continued on back. Complete Registered Representative's Report on back of
- --------------------------------------------------------------------------
this form for NASD required information)
- ----------------------------------------
SML-1375B NYCH Rev 12/98
<PAGE>
2. MONTHLY INSURANCE AND ADMINISTRATIVE CHARGES
Monthly insurance and administrative charges will be deducted from that
portion of the Allmerica Investment Trust Money Market Fund into which payor
premiums are allocated while the Payor Option is in effect; otherwise these
charges will be deducted pro-rata from all sub-accounts noted on the front of
this form unless otherwise indicated by written request.
I acknowledge receipt of a current prospectus describing the Group Flexible
Premium Variable Life Insurance, including the underlying funds.
I UNDERSTAND THAT THE DEATH BENEFIT AND DURATION OF COVERAGE FOR THE GROUP
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CERTIFICATE APPLIED FOR MAY INCREASE
OR DECREASE TO REFLECT THE INVESTMENT EXPERIENCE OF THE SUB-ACCOUNTS OF THE
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY VARIABLE ACCOUNT.
I UNDERSTAND THAT THE CERTIFICATE VALUE FOR THE GROUP FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE CERTIFICATE APPLIED FOR MAY INCREASE OR DECREASE TO
REFLECT THE INVESTMENT EXPERIENCE OF THE SUB-ACCOUNTS OF THE FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY VARIABLE ACCOUNT, AND IS NOT GUARANTEED AS
TO DOLLAR AMOUNT. THERE IS NO GUARANTEED MINIMUM CERTIFICATE VALUE.
I believe that a Group Flexible Premium Variable Life Insurance certificate
is consistent with my investment objectives and financial needs.
Signature of Proposed Insured Signature of Owner
(if other than Proposed Insured)
_____________________________________ _______________________________________
Signed at (City and State) Date
_____________________________________ _______________________________________
3. SPECIAL REQUESTS
______________________________________________________________________________
______________________________________________________________________________
REGISTERED REPRESENTATIVE'S REPORT
1. The owner / / is / / is not an associated person of another broker/dealer.
2. Based on information furnished by the Owner, I believe that a Group
Flexible Premium Variable Life Insurance certificate is consistent with the
Owner's investment objectives for (state objectives):
______________________________________________________________________________
______________________________________________________________________________
3. The Owner's tax status is (indicate tax bracket and any other pertinent
tax information):
______________________________________________________________________________
4. I certify that reasonable effort was made to obtain and record information
pertaining to the suitability of this application.
5. I further certify that the Prospectuses were delivered, and that no
written sales materials were used other than those furnished or approved by
the Principal Office.
Signature Underwriting Approval
_____________________________________ _______________________________________
Registered Representative (Completed in Principal Office)
<PAGE>
ALLMERICA FINANCIAL SUPPLEMENT TO ENROLLMENT FORM
LIFE INSURANCE AND ANNUITY 440 Lincoln Street FOR GROUP FLEXIBLE PREMIUM
COMPANY Worcester, MA 01653 VARIABLE LIFE INSURANCE
Proposed Insured ______________________________________________________________
1. ALLOCATION OF NET PREMIUM
The Payor Option is elected if the Payor's name and address are listed below:
_______________________________________
_______________________________________
_______________________________________
I direct that the Company mail all premium notices to the Payor while the Payor
Option is in effect. The premium notices will include the insurance charges and
administrative charges to be paid by me and the Payor. The net premiums paid
for administrative charges and insurance charges shall be allocated to a portion
of the Allmerica Investment Trust Money Market Fund (called the "monthly
deduction sub-account") while the Payor Option is in effect.
(NOTE: Please indicate below how the net premium not allocated to the "monthly
deduction sub-account" will be allocated to the General Account and
appropriate sub-accounts of the Variable Account. This allocation shall apply
to the entire net premium if the Payor Option is not elected. WHOLE
PERCENTAGES MUST TOTAL 100%. Please refer to the Prospectuses for a definition
of "net premium" and for information about the General Account and other
sub-accounts of the Variable Account.)
Investment Options Investment Objective
------------------ ___________ --------------------
___________% Emerging Markets |
|
___________% International Equity | International
___________|
___________% Trend Series |
|
___________% DelCap Series | Aggressive Growth
|
___________% Small Cap Value |
___________|
___________% Devon Series | Growth
___________|
___________% Social Awareness |
|
___________% Decatur Total Return | Growth/Income
___________|
___________% Delaware Series | Asset Allocation
___________|
___________% Delchester Series |
|
___________% Strategic Income | Income
___________|
___________% Capital Reserves |
|
___________% Cash Reserves | Capital Preservation
___________|
___________% REIT Series | Other
___________|
___________% General Account
___________% ________________________________
___________% ________________________________
___________% ________________________________
100 % Total
I understand that funds may be deposited to a MAXIMUM of fourteen sub-accounts.
ALL NET PAYMENTS WILL BE ALLOCATED TO THE CASH RESERVES SERIES UNLESS I SPECIFY
OTHERWISE.
(Continued on back. Complete Registered Representative's Report on back of this
- -------------------------------------------------------------------------------
form for NASD required information)
- -----------------------------------
SML-1375BES
<PAGE>
2. MONTHLY INSURANCE AND ADMINISTRATIVE CHARGES
Monthly insurance and administrative charges will be deducted from that
portion of the Allmerica Investment Trust Money Market Fund into which payor
premiums are allocated while the Payor Option is in effect; otherwise these
charges will be deducted pro-rata from all sub-accounts noted on the front of
this form unless otherwise indicated by written request.
I acknowledge receipt of a current prospectus describing the Group Flexible
Premium Variable Life Insurance, including the underlying funds.
I UNDERSTAND THAT THE DEATH BENEFIT AND DURATION OF COVERAGE FOR THE GROUP
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CERTIFICATE APPLIED FOR MAY INCREASE
OR DECREASE TO REFLECT THE INVESTMENT EXPERIENCE OF THE SUB-ACCOUNTS OF THE
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY VARIABLE ACCOUNT.
I UNDERSTAND THAT THE CERTIFICATE VALUE FOR THE GROUP FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE CERTIFICATE APPLIED FOR MAY INCREASE OR DECREASE TO
REFLECT THE INVESTMENT EXPERIENCE OF THE SUB-ACCOUNTS OF THE ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY VARIABLE ACCOUNT, AND IS NOT
GUARANTEED AS TO DOLLAR AMOUNT. THERE IS NO GUARANTEED MINIMUM CERTIFICATE
VALUE.
I believe that a Group Flexible Premium Variable Life Insurance certificate is
consistent with my investment objectives and financial needs.
Signature of Owner
_______________________________________________________________________________
Signed at (City and State) Date
_______________________________________ _______________________________________
3. SPECIAL REQUESTS
_______________________________________________________________________________
_______________________________________________________________________________
REGISTERED REPRESENTATIVE'S REPORT
1. The Owner / / is / / is not an associated person of another broker/dealer.
2. Based on information furnished by the Owner, I believe that a Group Flexible
Premium Variable Life Insurance certificate is consistent with the Owner's
investment objectives for (state objectives):
_______________________________________________________________________________
_______________________________________________________________________________
3. The Owner's tax status is (indicate tax bracket and any other pertinent tax
information):
_______________________________________________________________________________
4. I certify that reasonable effort was made to obtain and record information
pertaining to the suitability of this application.
5. I further certify that the Prospectuses were delivered, and that no written
sales materials were used other than those furnished or approved by the
Principal Office.
Signature Underwriting Approval
______________________________________ _______________________________________
Registered Representative (Completed in Principal Office)
<PAGE>
November 17, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: GROUP VEL ACCOUNT OF ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY
FILE NOS.: 33-82658 AND 811-08704
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
the Group VEL Account on Form S-6 under the Securities Act of 1933 with
respect to the Company's group Flexible premium variable life insurance
policies.
I am of the following opinion:
1. The Group Vel Account is a separate account of the Company validly
existing pursuant to the Delaware Insurance Code and the regulations
issued thereunder.
2. The assets held in the Group VEL Account equal to the reserves and other
Policy liabilities of the Policies which are supported by the Group VEL
Account are not chargeable with liabilities arising out of any other
business the Company may conduct.
3. The group flexible premium variable life insurance policies, when issued
in accordance with the Prospectuses 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
Post-Effective Amendment to the Registration Statement of the Group VEL
Account on Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila St. Hilaire
-------------------
Sheila St. Hilaire
Assistant Vice President and Counsel
<PAGE>
November 17, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
RE: GROUP VEL ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY
FILE NOS.: 33-82658 AND 811-08704
Gentlemen:
This opinion is furnished in connection with the filing by Allmerica Financial
Life Insurance and Annuity Company of the Post-Effective Amendment to the
Registration Statement on Form S-6 of its group flexible premium variable
life insurance policies ("Policies") allocated to the Group VEL Account under
the Securities Act of 1933. The prospectuses included in the Post-Effective
Amendment to the Registration Statement describe the Policies. I am familiar
with and have provided actuarial advice concerning the preparation of the
Post-Effective Amendment to the Registration Statement, including exhibits.
In my professional opinion, the illustration of death benefits and cash
values included in Appendix C of the prospectuses, based on the assumptions
stated in the illustrations, are consistent with the provisions of the
Policy. The rate structure of the Policies has not been designed so as to
make the relationship between premiums and benefits, as shown in the
illustrations, appear more favorable to a prospective purchaser of a Policy
for a person age 30 or a person age 45 than to prospective purchasers of
Policies for people at other ages or underwriting classes.
I am also of the opinion that the aggregate fees and charges under the Policy
are reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to the
Post-Effective Amendment of the Registration Statement.
Sincerely,
/s/ William M. Mawdsley
--------------------------------
William M. Mawdsley, FSA, MAAAA
Vice President and Actuary
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 10 to the Registration Statement of the Group
VEL Account of Allmerica Financial Life Insurance and Annuity Company on Form
S-6 of our report dated February 3, 1998, relating to the financial
statements of Allmerica Financial Life Insurance and Annuity Company, and our
report dated March 25, 1998, relating to the financial statements of the
Group VEL Account of Allmerica Financial Life Insurance and Annuity Company,
both of which appear in such Prospectus. We also consent to the reference to
us under the heading "Independent Accountants" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 4, 1998
