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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
INDIVIDUAL FLEXIBLE PAYMENT VARIABLE LIFE INSURANCE POLICIES
ALLMERICA SELECT LIFE
This Prospectus provides important information about Allmerica Select Life, an
individual flexible payment variable life insurance policy issued by Allmerica
Financial Life Insurance and Annuity Company. The Policies are funded through
the Allmerica Select Separate Account II, a separate investment account of the
Company that is referred to as the Variable Account. PLEASE READ THIS PROSPECTUS
CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE.
The Variable Account is subdivided into Sub-Accounts. Each Sub-Account invests
exclusively in shares of one of the following Funds of Allmerica Investment
Trust, Fidelity Variable Insurance Products Fund, and T. Rowe Price
International Series, Inc.:
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FUND MANAGER
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Select Emerging Markets Fund Schroder Investment Management North America Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund TCW Investment Management Company
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Select Growth and Income Fund J. P. Morgan Investment Management Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Select Income Fund* Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
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*The Company has requested the necessary regulatory approvals to substitute
shares of the Select Investment Grade Income Fund of the Allmerica Investment
Trust for shares of the currently offered Select Income Fund. Subject to
receiving the necessary approvals, this substitution will take place on or about
July 1, 2000.
Policy owners may, within limits, choose the amount of initial payment and vary
the frequency and amount of future payments. The Policy allows partial
withdrawals and full surrender of the Policy's surrender value, within limits.
The Policies are not suitable for short-term investment because of the
substantial nature of the surrender charge. If you think about surrendering the
Policy, consider the lower deferred sales charges that apply during the first
two years from the date of issue or an increase in face amount.
THE PURPOSE OF THE POLICIES IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE POLICY,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.
THE POLICIES ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. VARIABLE LIFE POLICIES
INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. IT MAY NOT BE ADVANTAGEOUS
TO REPLACE EXISTING INSURANCE WITH THE POLICY. THIS LIFE POLICY IS NOT: A BANK
DEPOSIT OR OBLIGATION; OR FEDERALLY INSURED; OR ENDORSED BY ANY BANK OR
GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
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CORRESPONDENCE MAY BE MAILED TO: DATED MAY 1, 2000
ALLMERICA SELECT 440 LINCOLN STREET
P.O. BOX 8179 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8179 (508) 855-1000
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TABLE OF CONTENTS
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SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND CHARGES................................. 7
SUMMARY OF POLICY FEATURES.................................. 11
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE
UNDERLYING FUNDS........................................... 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 20
SUBSTITUTION OF SHARES OF THE SELECT INCOME FUND............ 22
THE POLICY.................................................. 23
Applying for a Policy..................................... 23
Free-Look Period.......................................... 23
Conversion Privilege...................................... 24
Payments.................................................. 24
Allocation of Net Payments................................ 25
Transfer Privilege........................................ 25
Death Benefit............................................. 27
Guaranteed Death Benefit Rider............................ 27
Level Option and Adjustable Option........................ 28
Change to Level Option or Adjustable Option............... 30
Change in Face Amount..................................... 31
Policy Value.............................................. 32
Payment Options........................................... 33
Optional Insurance Benefits............................... 33
Surrender................................................. 34
Partial Withdrawal........................................ 34
Paid-up Insurance Option.................................. 34
CHARGES AND DEDUCTIONS...................................... 36
Payment Expense Charge.................................... 36
Monthly Insurance Protection Charges...................... 36
Charges Against or Reflected in the Assets of the Variable
Account................................................. 38
Surrender Charge.......................................... 39
Partial Withdrawal Costs.................................. 40
Transfer Charges.......................................... 40
Charge for Change in Face Amount.......................... 41
Other Administrative Charges.............................. 41
POLICY LOANS................................................ 42
Preferred Loan Option..................................... 42
Loan Interest Charged..................................... 42
Repayment of Outstanding Loan............................. 43
Effect of Policy Loans.................................... 43
Policies Issued in Connection with TSA Plans.............. 43
POLICY TERMINATION AND REINSTATEMENT........................ 44
Termination............................................... 44
Reinstatement............................................. 44
OTHER POLICY PROVISIONS..................................... 45
Policy Owner.............................................. 45
Beneficiary............................................... 45
Assignment................................................ 46
Limit on Right to Challenge Policy........................ 46
Suicide................................................... 46
Misstatement of Age or Sex................................ 46
Delay of Payments......................................... 46
FEDERAL TAX CONSIDERATIONS.................................. 47
</TABLE>
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<S> <C>
The Company and the Variable Account...................... 47
Taxation of the Policies.................................. 47
Policy Loans.............................................. 47
Policies Issued in Connection with TSA Plans.............. 48
Modified Endowment Policies............................... 48
VOTING RIGHTS............................................... 49
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 50
DISTRIBUTION................................................ 51
REPORTS..................................................... 51
LEGAL PROCEEDINGS........................................... 52
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 52
FURTHER INFORMATION......................................... 53
MORE INFORMATION ABOUT THE FIXED ACCOUNT.................... 53
General Description....................................... 53
Fixed Account Interest and Policy Loans................... 53
Transfers, Surrenders, and Partial Withdrawals............ 54
INDEPENDENT ACCOUNTANTS..................................... 54
FINANCIAL STATEMENTS........................................ 54
APPENDIX A -- GUIDELINE MINIMUM SUM INSURED TABLE........... A-1
APPENDIX B -- OPTIONAL INSURANCE BENEFITS................... B-1
APPENDIX C -- PAYMENT OPTIONS............................... C-1
APPENDIX D -- ILLUSTRATIONS................................. D-1
APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES...... E-1
APPENDIX F -- PERFORMANCE INFORMATION....................... F-1
FINANCIAL STATEMENTS........................................ FIN-1
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SPECIAL TERMS
AGE: how old the Insured is on the birthday closest to a Policy anniversary.
BENEFICIARY: the person or persons you name to receive the net death benefit
when the Insured dies.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us," and "the Company" refer to Allmerica Financial Life Insurance and Annuity
Company in this Prospectus.
DATE OF ISSUE: the date the Policy was issued, used to measure the monthly
processing date, Policy months, Policy years and Policy anniversaries.
DEATH BENEFIT: the amount payable when the Insured dies prior to the final
payment date, before deductions for any outstanding loan and partial
withdrawals, partial withdrawal costs, and due and unpaid monthly insurance
protection charges.
EVIDENCE OF INSURABILITY: information, including medical information, used to
decide the Insured's underwriting class.
FACE AMOUNT: the amount of insurance coverage applied for. The initial face
amount is shown in your Policy.
FINAL PAYMENT DATE: the Policy anniversary nearest the Insured's 95th birthday.
After this date, no payments may be made. The Net Death Benefit may be different
before and after the Final Payment Date. See NET DEATH BENEFIT.
FIXED ACCOUNT: a guaranteed account of the general account that guarantees
principal and a fixed interest rate.
FUNDS (UNDERLYING FUNDS): the following investment portfolios of Allmerica
Investment Trust ("Trust"): Select Emerging Markets Fund, Select International
Equity Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Value Opportunity Fund, Select Growth Fund, Select Strategic Growth Fund,
Select Growth and Income Fund, Select Income Fund and Money Market Fund; the
following investment portfolios of Fidelity Variable Insurance Products Fund
("Fidelity VIP"): Fidelity VIP Growth Portfolio, Fidelity VIP Equity-Income
Portfolio and Fidelity VIP High Income Portfolio; and the T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc. ("T.
Rowe Price").
GENERAL ACCOUNT: all our assets other than those held in a separate investment
account.
GUIDELINE ANNUAL PREMIUM: used to compute the maximum surrender charge and
illustrate accumulations in Appendix D. The guideline annual premium is the
annual amount that would be payable through the final payment date for the
specified Level Option death benefit. We assume that:
- The timing and amount of payments are fixed and paid at the start of the
Policy year
- Monthly insurance protection charges are based on the Commissioners 1980
Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Mortality Table
B for unisex policies)
- Net investment earnings are at an annual effective rate of 5.0%
- Fees and charges apply as set forth in the Policy and any Policy Riders
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GUIDELINE MINIMUM SUM INSURED: the minimum death benefit required to qualify the
Policy as "life insurance" under federal tax laws. The guideline minimum sum
insured is the PRODUCT of:
- The policy value TIMES
- A percentage based on the Insured's age
The percentage factor is a percentage that, when multiplied by the Policy Value,
determines the minimum death benefit required under federal tax laws. For both
the Level Option and the Adjustable Option, the percentage factor is based on
the Insured's attained age, as set forth in APPENDIX A -- GUIDELINE MINIMUM SUM
INSURED TABLE.
INSURANCE PROTECTION AMOUNT: the death benefit less the policy value.
ISSUANCE AND ACCEPTANCE: the date we mail the Policy if the application or
enrollment form is approved with no changes requiring your consent; otherwise,
the date we receive your written consent to any changes.
LOAN VALUE: the maximum amount you may borrow under the Policy.
MINIMUM MONTHLY PAYMENT: a monthly amount shown in your Policy. If you pay this
amount, we guarantee that your Policy will not lapse before the 49th monthly
processing date from the Date of Issue or increase in Face Amount, within
limits.
MONTHLY PROCESSING DATE: the date, shown in your Policy, when monthly insurance
protection charges are deducted.
NET DEATH BENEFIT: Before the Final Payment Date, the net death benefit is:
- The death benefit under either the Level Option or Adjustable Option MINUS
- Any outstanding loan on the Insured's death and partial withdrawals,
partial withdrawal costs, and due and unpaid monthly insurance protection
charges.
Where permitted by state law, we will compute the Net Death Benefit on the date
we receive due proof of the Insured's death under the Adjustable Option and on
the date of death for the Level Option. If required by state law, we will
compute the Net Death Benefit on the date of death for the Adjustable Option.
After the final payment date, the net death benefit generally is:
- The policy value MINUS
- Any outstanding loan.
If the Guaranteed Death Benefit Rider is in effect, after the Final Payment
Date, the death benefit is the greater of:
- the Face Amount as of the Final Payment Date; or
- the Policy Value as of the date due proof of death is received by the
Company.
NET PAYMENT: your payment less a payment expense charge.
OUTSTANDING LOAN: all unpaid Policy loans plus loan interest due or accrued.
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PAID-UP INSURANCE: life insurance coverage for the life of the Insured, with no
further premiums due.
POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
Rider, or a change in death benefit option (Level Option or Adjustable Option).
POLICY OWNER: the person who may exercise all rights under the Policy, with the
consent of any irrevocable beneficiary. "You" and "your" refer to the Policy
owner in this Prospectus.
POLICY VALUE: the total value of your Policy. It is the SUM of the:
- Value of the units of the sub-accounts credited to your Policy PLUS
- Accumulation in the fixed account credited to the Policy
PREMIUM: a payment you must make to us to keep the Policy in force.
PRINCIPAL OFFICE: our office at 440 Lincoln Street, Worcester, Massachusetts
01653.
PRO-RATA ALLOCATION: an allocation among the Fixed Account and the Sub-Accounts
in the same proportion that, on the date of allocation, the Policy Value in the
Fixed Account and the Policy value in each sub-account bear to the total Policy
Value.
SUB-ACCOUNT: a subdivision of the variable account investing exclusively in the
shares of a fund.
SURRENDER VALUE: the amount payable on a full surrender. It is the policy value
less any outstanding loan and surrender charges.
UNDERWRITING CLASS: the insurance risk classification that we assign the Insured
based on the information in the application or enrollment form and other
evidence of insurability we consider. The Insured's underwriting class will
affect the monthly insurance protection charge and the payment required to keep
the Policy in force.
UNIT: a measure of your interest in a Sub-Account.
VALUATION DATE: any day on which the net asset value of the shares of any funds
and unit values of any sub-accounts are computed. Valuation dates currently
occur on:
- Each day the New York Stock Exchange is open for trading
- Other days (other than a day during which no payment, partial withdrawal
or surrender of a Policy was received) when there is a sufficient degree
of trading in a fund's portfolio securities so that the current net asset
value of the sub-accounts may be materially affected
VALUATION PERIOD: the interval between two consecutive valuation dates.
VARIABLE ACCOUNT: Allmerica Select Separate Account II, one of our separate
investment accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
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SUMMARY OF FEES AND CHARGES
WHAT CHARGES WILL I INCUR UNDER MY POLICY?
The following charges will apply to your Policy under the circumstances
described. Some of these charges apply throughout the Policy's duration. Other
charges apply only if you choose options under the Policy.
- From each payment, we will deduct a payment expense charge, currently
4.0%. The payment expense charge has three parts:
PREMIUM TAX DEDUCTION--A current premium tax deduction of 2.5% of
payments represents our average expenses for state and local premium
taxes.
DEFERRED ACQUISITION COSTS ("DAC TAX") DEDUCTION--A current DAC tax
deduction of 1.0% of payments helps reimburse us for federal taxes
imposed on our deferred acquisition costs of the Policies.
FRONT-END SALES LOAD--From each payment, we will deduct a front-end sales
load of 0.5% of the payment. This charge partially compensates us for
Policy sales expenses.
- We deduct the following monthly charge from policy value:
MONTHLY INSURANCE PROTECTION CHARGE--This charge is the cost of
insurance, including optional insurance benefits provided by Rider.
- The following expenses are charged against or reflected in the variable
account:
ADMINISTRATIVE CHARGE--We deduct this charge during the first ten Policy
years only. It is a daily charge at an annual rate of 0.15% of the
average daily net asset value of each sub-account. This charge helps
compensate us for our expenses in administering the variable account and
is eliminated after the tenth Policy year.
MORTALITY AND EXPENSE RISK CHARGE--We impose a daily charge at a current
annual rate of 0.65% of the average daily net asset value of each
sub-account. This charge compensates us for assuming mortality and
expense risks for variable interests in the Policies. Our Board of
Directors may increase this charge, subject to state and federal law, to
an annual rate no greater than 0.80%.
FUND EXPENSES--The funds incur investment advisory fees and other
expenses, which are reflected in the variable account. The levels of fees
and expenses vary among the funds.
- Charges designed to reimburse us for Policy administrative costs apply
under the following circumstances:
CHARGE FOR CHANGE IN FACE AMOUNT--For each increase or decrease in face
amount, we deduct a charge of $50 from policy value. This charge is for
the underwriting and administrative costs of the change.
CHARGE FOR OPTIONAL GUARANTEED DEATH BENEFIT RIDER--A one time
administrative charge of $25 will be deducted from Policy Value when the
Rider is elected.
TRANSFER CHARGE--Currently, the first 12 transfers of policy value in a
Policy year are free. A current transfer charge of $10, never to exceed
$25, applies for each additional transfer in the same Policy year. This
charge is for the costs of processing the transfer.
OTHER ADMINISTRATIVE CHARGES--We reserve the right to charge for other
administrative costs we incur. While there are no current charges for
these costs, we may impose a charge for
- Changing net payment allocation instructions
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- Changing the allocation of monthly insurance protection charges among
the various sub-accounts
- Providing a projection of values
- The charges below apply only if you surrender your Policy or make
partial withdrawals:
SURRENDER CHARGE--This charge applies only on a full surrender or
decrease in face amount within ten years of the date of issue or of an
increase in face amount. The maximum surrender charge has two parts:
- A deferred administrative charge of $8.50 per thousand dollars of the
initial face amount or increase
- A deferred sales charge of 28.5% of payments received or associated
with the increase up to the guideline annual premium for the increase
The maximum surrender charge is level for the first 24 Policy months,
then reduces by 1/96th per month, reaching zero after 10 Policy years.
During the first two years following the date of issue or increase, the
actual surrender charge may be less than the maximum surrender charge
calculated above. For more information, see APPENDIX E -- CALCULATION OF
MAXIMUM SURRENDER CHARGES.
PARTIAL WITHDRAWAL COSTS--We deduct from the policy value the following
for partial withdrawals:
- A transaction fee of 2.0% of the amount withdrawn, not to exceed $25,
for each partial withdrawal for processing costs
- A partial withdrawal charge of 5.0% of a withdrawal exceeding the "Free
10% Withdrawal," described below
The partial withdrawal charge does not apply to:
- That part of a withdrawal equal to 10% of the policy value in a policy
year less prior free withdrawals made in the same policy year ("free
10% withdrawal")
- Withdrawals when no surrender charge applies
We reduce the policy's outstanding surrender charge, if any, by partial
withdrawal charges that we previously deducted. The transaction fee
applies to all partial withdrawals, including a Withdrawal without a
surrender charge.
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WHAT ARE THE EXPENSES AND FEES OF THE 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 1999.
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MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER ANY (AFTER ANY APPLICABLE (AFTER ANY WAIVERS/
UNDERLYING FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- ------------------ --------------------- -------------------
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Select Emerging Markets Fund.............. 1.35% 0.57% 1.92%(1)(2)
Select International Equity Fund.......... 0.89% 0.13% 1.02%(1)(2)
T. Rowe Price International Stock
Portfolio................................ 1.05% 0.00% 1.05%
Select Aggressive Growth Fund............. 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation Fund.......... 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund............. 0.90% 0.07% 0.97%(1)(2)
Select Growth Fund........................ 0.78% 0.05% 0.83%(1)(2)
Select Strategic Growth Fund.............. 0.85% 0.35% 1.20%(1)(2)
Fidelity VIP Growth Portfolio............. 0.58% 0.08% 0.66%(3)
Select Growth and Income Fund............. 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP Equity-Income Portfolio...... 0.48% 0.09% 0.57%(3)
Fidelity VIP High Income Portfolio........ 0.58% 0.11% 0.69%
Select Income Fund........................ 0.52% 0.09% 0.61%(1)
Money Market Fund......................... 0.24% 0.05% 0.29%(1)
</TABLE>
* Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised.
The Management Fee and Total Fund Expense ratios shown in the table above
have been adjusted to assume that the revised rates took effect January 1,
1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of
1.50% of average net assets for Select International Equity Fund, 1.35% for
Select Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25%
for Select Value Opportunity Fund, 1.20% for Select Growth Fund, 1.10% for
Select Growth and Income Fund, 1.00% for Select Income Fund, and 0.60% for
Money Market Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1999.
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-advisor.
Until further notice, the Select Value Opportunity Fund's 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 declaration of a voluntary management fee or expense limitation in any
year does not bind AFIMS to declare future expense limitations with respect
to these Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as
reductions of expenses. Including these reductions, total annual fund
operating expenses were 1.01% for Select International Equity Fund, 1.88%
for Select Emerging Markets, 0.84% for Select Aggressive Growth Fund, 0.88%
for Select Value Opportunity Fund, 0.81% for Select Growth Fund, 1.17% for
Select Strategic Growth Fund, and 0.73% for Select Growth and Income Fund.
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(3) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or Fidelity Management & Research Company on behalf of certain
funds', custodian credits realized as a result of uninvested cash balances
were used to reduce a portion of the fund's expenses. Including these
reductions, total operating expenses presented in the table would have been
0.56% for the Fidelity VIP Equity-Income Portfolio and 0.65% for the
Fidelity VIP Growth Portfolio.
The Underlying Fund information above was provided by the Underlying Funds
and was not independently verified by the Company.
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SUMMARY OF POLICY FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. If you are considering the purchase of this
product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Policy, together with its attached application, constitutes the entire agreement
between you and the Company.
There is no guaranteed minimum Policy Value. The value of a Policy 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 Policy Value will also be adjusted for other factors, including the amount
of charges imposed. The Policy Value may decrease to the point where the Policy
will lapse and provide no further death benefit without additional premium
payments, unless the optional Guaranteed Death Benefit Rider is in effect. This
Rider may not be available in all states.
WHAT IS THE POLICY'S OBJECTIVE?
The objective of the Policy is to give permanent life insurance protection and
help you build assets tax-deferred. Features available through the Policy
include:
- A net death benefit that can protect your family
- Payment options that can guarantee an income for life
- A personalized investment portfolio
- Experienced professional investment advisers
- Tax deferral on earnings.
While the Policy is in force, it will provide:
- Life insurance coverage on the Insured
- Policy value
- Surrender rights and partial withdrawal rights
- Loan privileges
- Optional insurance benefits available by Rider.
The Policy combines features and benefits of traditional life insurance with the
advantages of professional money management. However, unlike the fixed benefits
of ordinary life insurance, the policy value and the Adjustable Option death
benefit will increase or decrease depending on investment results. Unlike
traditional insurance policies, the Policy has no fixed schedule for payments.
Within limits, you may make payments of any amount and frequency. While you may
establish a schedule of payments ("planned payments"), the Policy will not
necessarily lapse if you fail to make planned payments. Also, making planned
payments will not guarantee that the Policy will remain in force.
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WHO ARE THE KEY PERSONS UNDER THE POLICY?
The Policy is a contract between you and us. Each Policy has a Policy Owner
(you), an Insured (you or another individual you select) and a beneficiary. As
Policy Owner, you make payments, choose investment allocations and select the
Insured and beneficiary. The Insured is the person covered under the Policy. The
beneficiary is the person who receives the net death benefit when the Insured
dies.
WHAT HAPPENS WHEN THE INSURED DIES?
We will pay the net death benefit to the beneficiary when the Insured dies while
the Policy is in effect. You may choose between two death benefit options. Under
the Level Option, the death benefit is the face amount (the insurance applied
for) or the guideline minimum sum insured (the minimum death benefit federal tax
law requires), whichever is greater. Under the Adjustable Option, the death
benefit is either the sum of the face amount and policy value or the guideline
minimum sum insured, whichever is greater.
The Net Death Benefit is the death benefit less any outstanding loan and partial
withdrawals, partial withdrawal costs, and due and unpaid monthly insurance
protection charges. However, after the final payment date, the net death benefit
is the policy value less any outstanding loan. The beneficiary may receive the
net death benefit in a lump sum or under a payment option we offer.
An optional Guaranteed Death Benefit Rider is available ONLY AT ISSUE OF THE
POLICY. (The Guaranteed Death Benefit Rider may not be available in all states).
If this Rider is in effect, the Company:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account; and
- provides a guaranteed net death benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in Face Amount, as
described below. In addition, a one-time administrative charge of $25 will be
deducted from Policy Value when the Rider is elected. Certain transactions,
including policy loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the Rider. IF THIS RIDER IS TERMINATED, IT
CANNOT BE REINSTATED. FOR MORE INFORMATION, SEE "Guaranteed Death Benefit
Rider."
CAN I EXAMINE THE POLICY?
Yes. You have the right to examine and cancel your Policy by returning it to us
or to one of our representatives on or before the LATEST of:
- 45 days after the application or enrollment form for the Policy is signed
- 10 days after you receive the Policy (20 days when state law so requires
for the replacement of insurance and 30 days for California citizens age
60 and older)
- 10 days after we mail to you a notice of withdrawal right.
If your Policy provides for a full refund under its "Right to Examine Policy"
provision, the Company will mail a refund to you within seven days. We may delay
a refund of any payment made by check until the check has cleared the bank.
Where required by state law, your refund will be the GREATER of:
- Your entire payment OR
- The policy value PLUS deductions under the Policy or by the funds for
taxes, charges or fees.
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If your Policy does not provide for a full refund, you will receive:
- Amounts allocated to the fixed account PLUS
- The policy value in the variable account PLUS
- All fees, charges and taxes which have been imposed.
After an increase in face amount, a right to cancel the increase also applies.
WHAT ARE MY INVESTMENT CHOICES?
You have a choice of fourteen funds:
Select Emerging Markets Fund
Managed by Schroder Investment Management North America Inc.
Select International Equity Fund
Managed by Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio
Managed by Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund
Managed by Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund
Managed by T. Rowe Price Associates, Inc.
Select Value Opportunity Fund
Managed by Cramer Rosenthal McGlynn, LLC
Select Growth Fund
Managed by Putnam Investment Management, Inc.
Select Strategic Growth Fund
Managed by TCW Investment Management Company
Fidelity VIP Growth Portfolio
Managed by Fidelity Management & Research Company
Select Growth and Income Fund
Managed by J. P. Morgan Investment Management Inc.
Fidelity VIP Equity-Income Portfolio
Managed by Fidelity Management & Research Company
Fidelity VIP High Income Portfolio
Managed by Fidelity Management & Research Company
Select Income Fund
Managed by Standish, Ayer & Wood, Inc.
Money Market Fund
Managed by Allmerica Asset Management, Inc.
In some states, insurance regulations may restrict the availability of
particular Underlying Funds. The Policy also offers a Fixed Account that is part
of the general account of the Company. The Fixed Account is a guaranteed account
offering a minimum interest rate. This range of investment choices allows you to
allocate your money among the Sub-Accounts and the Fixed Account to meet your
investment needs.
If your Policy provides for a full refund under its "Right to Examine Policy"
provision as required in your state, we will allocate all sub-account
investments to the Money Market Fund until the fourth day after the
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expiration of the "Right to Examine" provision of your Policy. After this, we
will allocate all amounts as you have chosen.
WHO ARE THE INVESTMENT ADVISERS AND HOW ARE THEY SELECTED?
BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension consulting firm,
assists the Company in the selection of the Policy's Funds. In addition, BARRA
RogersCasey assists the Trust in the selection of investment advisers for the
Funds of the Trust. BARRA RogersCasey provides consulting services to pension
plans representing hundreds of billions of dollars in total assets and, in its
consulting capacity, monitors the investment performance of over 1000 investment
advisers. BARRA RogersCasey is wholly-controlled by BARRA, Inc. As a consultant,
BARRA RogersCasey has no decision-making authority with respect to the Funds,
and is not responsible for any advice provided by Allmerica Financial Investment
Management Services, Inc. ("AFIMS") or the investment advisers.
AFIMS, an affiliate of the Company, is the investment manager of the Trust.
AFIMS has entered into agreements with investment advisers ("Sub-Advisers")
selected by AFIMS and the Trustees in consultation with BARRA RogersCasey. Each
investment adviser is selected by using strict objective, quantitative, and
qualitative criteria, with special emphasis on the investment adviser's record
in managing similar portfolios. In consultation with BARRA RogersCasey, a
committee monitors and evaluates the ongoing performance of all of the Funds.
The committee may recommend the replacement of an investment adviser of one of
the Funds of the Trust, or the addition or deletion of Funds. The committee
includes members who may be affiliated or unaffiliated with the Company and the
Trust. The Sub-Advisers (other than Allmerica Asset Management, Inc.) are not
affiliated with the Company or the Trust.
Fidelity Management & Research Company ("FMR") is the investment adviser of
Fidelity VIP. FMR is one of America's largest investment management
organizations and has its principal business address at
82 Devonshire Street, Boston MA. It is composed of a number of different
companies, which provide a variety of financial services and products. FMR is
the original Fidelity company, founded in 1946. It provides a number of mutual
funds and other clients with investment research and portfolio management
services. The Portfolios of Fidelity VIP, as part of their operating expenses,
pay a monthly management fee to FMR for managing investments and business
affairs. The prospectus of Fidelity VIP contains additional information
concerning the Portfolios, including information concerning additional expenses
paid by the Portfolios, and should be read in conjunction with this Prospectus.
Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of the largest no-load international mutual fund asset managers with
approximately $42.5 billion (as of December 31, 1999) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires.
For a listing of the Funds and their managers, see "What Are My Investment
Choices?", above.
CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?
Yes. The Policy permits you to transfer Policy Value among the available
Sub-Accounts and between the Sub-Accounts and the General Account of the
Company, subject to certain limitations described under THE POLICY -- "Transfer
Privilege." Under present law, you will incur no current taxes on transfers
while your money is in the Policy.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, within limits.
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WHAT IF I NEED MY MONEY?
You may borrow up to the loan value of your Policy. You may also make partial
withdrawals and surrender the Policy for its surrender value. There are two
types of loans which may be available to you:
- A preferred loan option is available to you upon written request after the
first Policy year. It is available during Policy years 2-10 only if your
policy value, minus the surrender charge, is $50,000 or more. The option
applies to up to 10% of this amount. After the 10th Policy year, the
preferred loan option is available on all loans or on all or a part of the
loan value as you request. The guaranteed annual interest rate credited to
the policy value securing a preferred loan will be 8%.
- A non-preferred loan option is always available to you. The guaranteed
annual interest rate credited to the policy value securing a non-preferred
loan will be at least 6.0%. The current interest rate credited to
non-preferred loans is 7.2%.
We will allocate Policy loans among the sub-accounts and the fixed account
according to your instructions. If you do not make an allocation, we will make a
pro-rata allocation. We will transfer the policy value in each sub-account equal
to the Policy loan to the fixed account.
A request for a preferred loan after the Final Payment Date or partial
withdrawal after the Final Payment Date or the foreclosure of an outstanding
loan will terminate a Guaranteed Death Benefit Rider. See "Guaranteed Death
Benefit Rider." There is some uncertainty as to the tax treatment of a preferred
loan, which may be treated as a taxable withdrawal from the Policy. See FEDERAL
TAX CONSIDERATIONS, "Policy Loans."
You may surrender your Policy and receive its surrender value. After the first
Policy year, you may make partial withdrawals of $500 or more from policy value,
subject to partial withdrawal costs. Under the Level Option, the face amount is
reduced by each partial withdrawal. We will not allow a partial withdrawal if it
would reduce the face amount below $40,000. A surrender or partial withdrawal
may have tax consequences. See "Taxation of the Policies."
CAN I MAKE FUTURE CHANGES UNDER MY POLICY?
Yes. There are several changes you can make after receiving your Policy, within
limits. You may:
- Cancel your Policy under its right-to-examine provision
- Transfer your ownership to someone else
- Change the beneficiary
- Change the allocation of payments, with no tax consequences under current
law
- Make transfers of policy value among the funds
- Adjust the death benefit by increasing or decreasing the face amount
- Change your choice of death benefit options between the Level Option and
Adjustable Option
- Add or remove optional insurance benefits provided by Rider
CAN I CONVERT MY POLICY INTO A FIXED POLICY?
Yes. You can convert your Policy without charge during the first 24 months after
the date of issue or after an increase in face amount. On conversion, we will
transfer the policy value in the variable account to the fixed account. We will
allocate all future payments to the fixed account, unless you instruct us
otherwise.
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WHAT ARE THE LAPSE AND REINSTATEMENT PROVISIONS OF MY POLICY?
The Policy will not lapse if you fail to make payments unless:
- The Surrender Value is insufficient to cover the next monthly insurance
protection charge and loan interest accrued or
- The Outstanding Loan exceeds Policy Value less surrender charges
There is a 62-day grace period in either situation.
If you make payments at least equal to minimum monthly payments, we guarantee
that your Policy will not lapse before the 49th monthly processing date from
date of issue or increase in face amount, within limits. If the Guaranteed Death
Benefit Rider is in effect, the Policy will not lapse regardless of the
investment performance of the Variable Account (excluding loan foreclosure). For
more information, see "Guaranteed Death Benefit Rider."
If the Insured has not died, you may reinstate your Policy within three years
after the grace period. The Insured must provide evidence of insurability
subject to our then current underwriting standards. In addition, you must either
repay or reinstate any outstanding loans and make payments sufficient to keep
the Policy in force for three months. See POLICY TERMINATION AND REINSTATEMENT.
CAN I ELECT PAID-UP INSURANCE WITH NO FURTHER PREMIUMS DUE?
Yes. The Policy provides a paid-up insurance option. If this option is elected,
we will provide paid-up insurance coverage, usually having a reduced face
amount, for the life of the Insured with no more premiums being due under the
Policy. If you elect this option, policy owner rights and benefits will be
limited.
CAN THE POLICIES BE ISSUED IN CONNECTION WITH TSA PLANS?
The Policies may be issued in connection with Code Section 403(b) tax-sheltered
annuity plans ("TSA Plans") of certain public school systems and organizations
that are tax exempt under Section 501(c)(3) of the Code. A Policy issued in
connection with a TSA Plan will be endorsed to reflect the restrictions imposed
on assignment, premium payments, withdrawals, and surrender under Code Section
403(b). The Policyowner may terminate the endorsement at any time. However, the
termination of the endorsement may cause the Policy to fail to qualify under
Code Section 403(b). See FEDERAL TAX CONSIDERATIONS -- "Policies Issued in
Connection with TSA Plans." A Policy issued in connection with a TSA Plan may
also have limitations on Policy loans. See POLICY LOANS -- "Policies Issued in
Connection with TSA Plans."
HOW IS MY POLICY TAXED?
The Policy is given federal income tax treatment similar to a conventional fixed
benefit life insurance policy. On a withdrawal of policy value, Policy owners
currently are taxed only on the amount of the withdrawal that exceeds total
payments. Withdrawals greater than payments made are treated as ordinary income.
During the first 15 Policy years, however, an "interest first" rule applies to
distributions of cash required under Section 7702 of the Internal Revenue Code
("Code") because of a reduction in benefits under the Policy.
The net death benefit under the Policy is excludable from the gross income of
the beneficiary. However, in some circumstances federal estate tax may apply to
the net death benefit or the policy value.
A Policy may be considered a "modified endowment contract." This may occur if
total payments during the first seven Policy years (or within seven years of a
material change in the Policy) exceed the total net level payments payable, if
the Policy had provided paid-up future benefits after seven level annual
payments. If the
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Policy is considered a modified endowment contract, all distributions (including
Policy loans, partial withdrawals, surrenders and assignments) will be taxed on
an "income-first" basis. Also, a 10% additional penalty tax may be imposed on
that part of a distribution that is includible in income.
------------------------
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. The Prospectus and the Policy provide further
detail. The Policy provides insurance protection for the named beneficiary. The
Policy and its attached application or enrollment form are the entire agreement
between you and the Company.
THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. 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.
NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO A
SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
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DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
1974. As of December 31, 1999, the Company had over $17 billion in assets and
over $26 billion of life insurance in force. We are an indirect, wholly owned
subsidiary of First Allmerica Financial Life Insurance Company, formerly named
State Mutual Life Assurance Company of America ("First Allmerica"), which in
turn is a wholly-owned subsidiary of Allmerica Financial Corporation. First
Allmerica was organized under the laws of Massachusetts in 1844 and is the fifth
oldest life insurance company in America. Our principal office is 440 Lincoln
Street, Worcester, Massachusetts 01653, Telephone 1-800-366-1492. We are subject
to the laws of the state of Delaware, to regulation by the Commissioner of
Insurance of Delaware, and to other laws and regulations where we are licensed
to operate.
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 VARIABLE ACCOUNT
The variable account is a separate investment account with fourteen
sub-accounts. Each sub-account invests in a fund of the Trust, Fidelity VIP or
T. Rowe Price. The assets used to fund the variable part of the Policies are set
aside in sub-accounts and are separate from our general assets. We administer
and account for each sub-account as part of our general business. However,
income, capital gains and capital losses are allocated to each sub-account
without regard to any of our other income, capital gains or capital losses.
Under Delaware law, the assets of the variable account may not be charged with
any liabilities arising out of any other business of ours.
Our Board of Directors authorized the variable account by vote on October 12,
1993. The variable account meets the definition of "separate account" under
federal securities laws. It is registered with the Securities and Exchange
Commission ("SEC") as a unit investment trust under the Investment Company Act
of 1940 ("1940 Act"). This registration does not involve SEC supervision of the
management or investment practices or policies of the Variable Account or of the
Company. We reserve the right, subject to law, to change the names of the
Variable Account and the sub-accounts.
Each sub-account has two sub-divisions. One sub-division applies to Policies
during the first ten Policy years, which are subject to the administrative
charge. After the tenth Policy year, we automatically allocate a Policy to the
second sub-division to which the charge does not apply.
THE UNDERLYING FUNDS
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waiver/reimbursements see "WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?"
under the SUMMARY OF FEES AND CHARGES section. The prospectuses of the
Underlying Funds also contain information regarding fees for advisory services
and should be read in conjunction with this prospectus.
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ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. This registration
does not involve SEC supervision of the investments or investment policy of the
Trust or its separate investment portfolios.
First Allmerica established the Trust as a Massachusetts business trust on
October 11, 1984. The Trust is a vehicle for the investment of assets of various
separate accounts established by the Company, or other insurance companies.
Shares of the Trust are not offered to the public but solely to the separate
accounts. Ten different investment portfolios of the Trust are available under
the Policies, each issuing a series of shares: the Select Emerging Markets Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Value Opportunity Fund, Select Growth Fund, Select
Strategic Growth Fund, Select Growth and Income Fund, Select Income Fund and
Money Market Fund. The assets of each fund are held separate from the assets of
the other funds. Each fund operates as a separate investment vehicle. The income
or losses of one fund have no effect on the investment performance of another
fund. The sub-accounts reinvest dividends and/or capital gains distributions
received from a fund in more shares of that fund as retained assets.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment manager of the Trust. AFIMS, which is a wholly-owned subsidiary of
Allmerica Financial, has entered into agreements with other investment managers
("Sub-Advisers"), who manage the investments of the Funds. The Trustees have
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into a management agreement with AFIMS
AFIMS, subject to Trustee review, is responsible for the daily affairs of the
Trust and the general management of the Funds. AFIMS performs 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.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify 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 payments and
brokerage commissions,
- Fees and expenses of the Trustees who are not affiliated with AFIMS,
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses.
Under the Management Agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees in
consultation with BARRA RogersCasey, Inc. Under each Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
Fund, subject to the Trustee's instructions. The Sub-Advisers (other than
Allmerica Asset Management, Inc.) are not affiliated with the Company or the
Trust.
FIDELITY VIP
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
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registered with the SEC under the 1940 Act. Three of its investment portfolios
are available under the Policies: Fidelity VIP Growth Portfolio, Fidelity VIP
Equity-Income Portfolio and Fidelity VIP High Income Portfolio.
T. ROWE PRICE
T. Rowe Price, managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified, management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Policies:
the T. Rowe Price International Stock Portfolio. T. Rowe Price
Associates, Inc., an affiliate of Price-Fleming, serves as sub-adviser to the
Select Capital Appreciation Fund of the Trust.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of the funds is set forth below. BEFORE
INVESTING, READ CAREFULLY THE PROSPECTUSES OF THE TRUST, FIDELITY VIP AND T.
ROWE PRICE THAT ACCOMPANY THIS PROSPECTUS. THE PROSPECTUSES OF THE TRUST,
FIDELITY VIP AND T. ROWE PRICE CONTAIN MORE DETAILED INFORMATION ON THE FUNDS'
INVESTMENT OBJECTIVES, RESTRICTIONS, RISKS AND EXPENSES. Statements of
Additional Information for the funds are available on request. The investment
objectives of the funds may not be achieved. Policy value may be less than the
aggregate payments made under the Policy.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Investment Management North America Inc.
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. The Sub-Adviser for the Select International
Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The Manager of the Portfolio is Rowe Price-Fleming
International, Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies that are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management, L.P.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund will invest primarily in common stock of industries and
companies which are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser for the Select Capital Appreciation Fund is
T. Rowe Price Associates, Inc.
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. The Sub-Adviser for the Select Value Opportunity
Fund is Cramer Rosenthal McGlynn, LLC.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected for their
long-term growth potential. The Sub-Adviser for the Select Growth Fund is Putnam
Investment Management, Inc.
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SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is TCW Investment Management Company.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is J. P. Morgan Investment Management Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising S&P 500.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the
Fidelity VIP prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The fund will invest
primarily in investment grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund.
If there is a material change in the investment policy of a fund, we will notify
you of the change. If you have policy value allocated to that fund, you may
without charge reallocate the policy value to another fund or to the fixed
account. We must receive your written request within 60 days of the LATEST of
the:
- Effective date of the change in the investment policy OR
- Receipt of the notice of your right to transfer.
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SUBSTITUTION OF SHARES OF THE SELECT INCOME FUND
On January 31, 2000, the Company, First Allmerica (collectively, the
"Companies") and several other applicants filed an application with the
Securities and Exchange Commission in part seeking an order approving the
substitution of shares of the Select Investment Grade Income Fund of Allmerica
Investment Trust for shares of the Select Income Fund. To the extent required by
law, approvals of such substitutions will also be obtained from the state
insurance regulators in certain jurisdictions. The Companies will bear any
expenses in connection with the proposed substitution. Although subject to
change and obtaining necessary regulatory approvals, the Companies are currently
planning to effect the substitution on or about July 1, 2000.
The Select Investment Grade Income Fund seeks as high a level of total return,
which includes capital appreciation as well as income, as is consistent with
prudent investment management. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Select Investment Grade Income Fund. For more information
about the Select Investment Grade Income Fund, see the prospectus of the Trust.
Under the proposed substitution, during the period from February 14, 2000 until
the date the Select Income Fund is replaced by the Select Investment Grade
Income Fund, a Policy owner with value in the Sub-Account investing in the
Select Income Fund may make one transfer of all amounts in that Sub-Account to
and among any of the other Sub-Accounts and the Fixed Account. This transfer of
all amounts from the Sub-Account investing in the Select Income Fund prior to
the substitution date will be free of any transfer charge and will not count as
one of the twelve transfers guaranteed to be free of the transfer charge in each
Policy year. In addition, on the date the proposed substitution is completed, a
Policy Owner that has amounts invested in the Select Investment Grade Income
Fund as a result of the substitution will have a period of 60 days to make one
transfer of all amounts allocated to the Sub-Account investing in the Select
Investment Grade Income Fund to any one or more of the investment options
available under the Policy. This transfer will be free of any transfer charge
and will not count as one of the twelve transfers guaranteed to be free of the
transfer charge in that Policy year. All Policy owners with value in the
affected Sub-Account on the date the substitution is made will receive written
notice that the substitution has been completed.
THE TERMS AND CONDITIONS OF THE PROPOSED SUBSTITUTION ARE SUBJECT TO CHANGE. IN
PARTICULAR, THE TERMS AND CONDITIONS OF ANY SEC EXEMPTION ORDER, IF AND WHEN
GRANTED, MAY REQUIRE CHANGES IN THE PROPOSED SUBSTITUTION.
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THE POLICY
APPLYING FOR A POLICY
We offer Policies to applicants 85 years old and under. After receiving a
completed application or enrollment form from a prospective Policy owner, we
will begin underwriting to decide the insurability of the proposed Insured. We
may require medical examinations and other information before deciding
insurability. We issue a Policy only after underwriting has been completed. We
may reject an application or enrollment form that does not meet our underwriting
guidelines.
If a prospective Policy owner makes an initial payment of at least one minimum
monthly payment, we will provide fixed conditional insurance during
underwriting. The fixed conditional insurance will be the insurance applied for,
up to a maximum of $500,000, depending on age and underwriting class. This
coverage will continue for a maximum of 90 days from the date of the application
or enrollment form or, if required, the completed medical exam. If death is by
suicide, we will return only the premium paid.
If no fixed conditional insurance was in effect, on Policy delivery we will
require a sufficient payment to place the insurance in force.
If you made payments before the date of issue and acceptance, we will allocate
the payments to the Money Market Fund within two business days of receipt of the
payments at our principal office. If the Policy is not issued and accepted, we
will return to you the GREATER of:
- Your payments OR
- The value of the amount allocated to the Money Market Fund, which will be
net of mortality and expense risk charges, administrative charges and fund
expenses.
If your application or enrollment form is approved and the Policy is issued and
accepted, we will allocate your policy value on issuance and acceptance
according to your instructions. However, if your Policy provides for a full
refund of payments under its "Right to Examine Policy" provision as required in
your state (see THE POLICY -- "Free-Look Period"), we will initially allocate
your sub-account investments to the Money Market Fund. This allocation to the
Money Market Fund will be for:
- 14 days from issuance and acceptance, except as described below
- 24 days from issuance and acceptance for replacements in states with an
extended right to examine
- 34 days from issuance and acceptance for California citizens age 60 and
older, who have an extended right to examine.
After this, we will allocate all amounts according to your investment choices.
FREE-LOOK PERIOD
The Policy provides for a free look period. You have the right to examine and
cancel your Policy by returning it to us or to one of our representatives on or
before the LATEST of:
- 45 days after the application or enrollment form for the Policy is signed
- 10 days after you receive the Policy (20 days when the law so requires for
the replacement of insurance and 30 days for California citizens age 60
and older) OR
- 10 days after we mail to you a notice of withdrawal right.
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If your Policy provides for a full refund under its "Right to Examine Policy"
provision, the Company will mail a refund to you within seven days. We may delay
a refund of any payment made by check until the check has cleared your bank.
Where required by state law, your refund will be the GREATER of
- Your entire payment OR
- The policy value PLUS deductions under the Policy or by the funds for
taxes, charges or fees
If your Policy does not provide for a full refund, you will receive
- Amounts allocated to the fixed account PLUS
- The policy value in the variable account PLUS
- All fees, charges and taxes which have been imposed
After an increase in face amount, we will mail or deliver a notice of a free
look for the increase. You will have the right to cancel the increase before the
LATEST of:
- 45 days after the application or enrollment form for the increase is
signed
- 10 days after you receive the new Policy specification pages issued for
the increase or
- 10 days after we mail or deliver a notice of withdrawal rights to you
On canceling the increase, you will receive a credit to your policy value of
charges deducted for the increase. We will refund to you the amount to be
credited if you request. We will waive any surrender charge computed for the
increase.
CONVERSION PRIVILEGE
Within 24 months of the date of issue or an increase in face amount, you can
convert your Policy into a Fixed Policy by transferring all policy value in the
sub-accounts to the fixed account. The conversion will take effect at the end of
the valuation period in which we receive, at our principal office, notice of the
conversion satisfactory to us. There is no charge for this conversion. We will
allocate all future payments to the fixed account, unless you instruct us
otherwise.
PAYMENTS
Payments are payable to the Company. Payments may be made by mail to our
principal office or through our authorized representative. All payments after
the initial payment are credited to the variable account or fixed account on the
date of receipt at the principal office.
You may establish a schedule of planned payments. If you do, we will bill you at
regular intervals. Making planned payments will not guarantee that the Policy
will remain in force. The Policy will not necessarily lapse if you fail to make
planned payments. You may make unscheduled payments before the final payment
date or skip planned payments. If the Guaranteed Death Benefit Rider is in
effect, there are certain minimum payment requirements.
You may choose a monthly automatic payment method of making payments. Under this
method, each month we will deduct payments from your checking account and apply
them to your Policy. The minimum payment allowed is $50.
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The Policy does not limit payments as to frequency and number. However, no
payment may be less than $100 without our consent. Payments must be sufficient
to provide a positive surrender value at the end of each Policy month or the
Policy may lapse. See POLICY TERMINATION AND REINSTATEMENT. During the first 48
Policy months following the date of issue or an increase in face amount, a
guarantee may apply to prevent the Policy from lapsing. The guarantee will apply
during this period if you make payments that, when reduced by policy loans,
partial withdrawals and partial withdrawal costs, equal or exceed the required
minimum monthly payments. The required minimum monthly payments are based on the
number of months the Policy, increase in face amount or policy change that
causes a change in the minimum monthly payment has been in force. MAKING MONTHLY
PAYMENTS EQUAL TO THE MINIMUM MONTHLY PAYMENTS DOES NOT GUARANTEE THAT THE
POLICY WILL REMAIN IN FORCE, EXCEPT AS STATED IN THIS PARAGRAPH.
Total payments may not exceed the current maximum payment limits under federal
tax law. These limits will change with a change in face amount, the addition or
deletion of a Rider, or a change between the Level Option and Adjustable Option.
Where total payments would exceed the current maximum payment limits, we will
only accept that part of a payment that will make total payments equal the
maximum. We will return any part of the payments greater than that amount.
However, we will accept a payment needed to prevent Policy lapse during a Policy
year. See POLICY TERMINATION AND REINSTATEMENT.
ALLOCATION OF NET PAYMENTS
The net payment equals the payment made less the payment expense charge. In the
application or enrollment form for your Policy, you decide the initial
allocation of the net payment among the fixed account and the sub-accounts. You
may allocate payments to one or more of the sub-accounts, but may not have
policy value in more than seven sub-accounts at once. The minimum amount that
you may allocate to a sub-account is 1.00% of the net payment. 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 payments by written request or
telephone request. You have the privilege to make telephone requests, unless you
elected not to have the privilege on the application or enrollment form. The
policy of the Company and its representatives and affiliates is that they will
not be responsible for losses resulting from acting on telephone requests
reasonably believed to be genuine. We will use reasonable methods to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses from unauthorized or fraudulent instructions. Such
procedures may include, among other things, requiring some form of personal
identification prior to acting upon instructions received by telephone. All
telephone requests are tape recorded. An allocation change will take effect on
the date of receipt of the notice at the principal office. No charge is
currently imposed for changing payment allocation instructions. We reserve the
right to impose a charge in the future, but guarantee that the charge will not
exceed $25.
The policy value in the sub-accounts will vary with investment experience. You
bear this investment risk. Investment performance may also affect the death
benefit. Review your allocations of payments and policy value as market
conditions and your financial planning needs change.
TRANSFER PRIVILEGE
Subject to our then current rules, you may transfer amounts among the
sub-accounts or between a sub-account and the fixed account. We will make
transfers at your written request or telephone request, as described in THE
POLICY -- "Allocation of Net Payments." Transfers are effected at the value next
computed after receipt of the transfer order. (You may not transfer that portion
of the policy value held in the fixed account that secures a Policy loan.)
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TRANSFER PRIVILEGES SUBJECT TO POSSIBLE LIMITS
The transfer privilege is subject to our consent. We reserve the right to impose
limits on transfers including, but not limited to, the:
Minimum amount that may be transferred
- Minimum amount that may remain in a sub-account following a transfer from
that sub-account
- Minimum period between transfers involving the fixed account
- Maximum amounts that may be transferred from the fixed account
Transfers to and from the fixed account are currently permitted only if:
- There has been at least a ninety (90) day period since the last transfer
from the fixed account; and
- The amount transferred from the fixed account in each transfer does not
exceed the lesser of $100,000 or 25% of the policy value under the Policy.
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may apply for automatic transfers:
- From the Money Market sub-account to one or more of the other sub-accounts
on a monthly, quarterly or semiannual schedule ("Dollar-Cost Averaging
Option")
- To reallocate policy value among the sub-accounts on a quarterly,
semiannual or annual schedule ("Automatic Rebalancing Option").
Each automatic transfer must be at least $100. We will process automatic
transfers on the 15th of each scheduled month. If the 15th is not a business day
or is the monthly processing date, we will process the automatic transfer on the
next business day.
Currently, the first 12 transfers in a Policy year are free. After that, we will
deduct a $10 transfer charge from amounts transferred in that Policy year. We
reserve the right to increase the charge, but we guarantee the charge will never
exceed $25. We also reserve the right to limit the number of free transfers in a
Policy year to six.
The first automatic transfer counts as one transfer toward the 12 free transfers
allowed in each Policy year. Each subsequent automatic transfer is also free,
but does not reduce the remaining number of transfers that are free in a Policy
year. Any transfers made for a conversion privilege, Policy loan or material
change in investment policy will not count toward the 12 free transfers.
SPECIAL TRANSFER PRIVILEGE UNDER PROPOSED SUBSTITUTION
The Company has requested the necessary regulatory approvals to substitute
shares of the Select Investment Grade Income Fund of the Allmerica Investment
Trust for shares of the currently offered Select Income Fund. Subject to
receiving the necessary approvals, this substitution will take place on or about
July 1, 2000. Policy Owners who have amounts invested in the Sub-Account
investing in the Select Income Fund have certain special transfer rights before
and after the proposed substitution is completed. For more information, see
SUBSTITUTION OF SHARES OF THE SELECT INCOME FUND.
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DEATH BENEFIT
The Policy provides two death benefit options: The Level Option and the
Adjustable Option (for more information, see LEVEL OPTION AND ADJUSTABLE
OPTION). If the Policy is in force on the Insured's death, we will, with due
proof of death, pay the net death benefit under the applicable death benefit
option to the named beneficiary. We will normally pay the net death benefit
within seven days of receiving due proof of the Insured's death, but we may
delay payment of net death benefits. See OTHER POLICY PROVISIONS -- "Delay of
Payments." The beneficiary may receive the net death benefit in a lump sum or
under a payment option. See APPENDIX C -- PAYMENT OPTIONS.
Before the final payment date, the net death benefit is:
- The death benefit provided under the Level Option or Adjustable Option,
whichever is elected and in effect on the date of death PLUS
- Any other insurance on the Insured's life that is provided by Rider MINUS
- Any outstanding loan and any partial withdrawals, partial withdrawal costs
and due and unpaid monthly insurance protection charges through the Policy
month in which the Insured dies
After the final payment date, if the Guaranteed Death Benefit Rider is not in
effect, the net death benefit is:
- The policy value MINUS
- Any outstanding loan
Where permitted by state law, we will compute the Net Death Benefit on
- The date we receive due proof of the Insured's death under the Adjustable
Option OR
- The date of death for the Level Option.
If required by state law, we will compute the Net Death Benefit on the date of
death for the Adjustable Option as well as for the Level Option.
GUARANTEED DEATH BENEFIT RIDER (NOT AVAILABLE IN ALL STATES)
An optional Guaranteed Death Benefit Rider is available only at issue of the
Policy. If this Rider is in effect, the Company:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account and
- provides a guaranteed net death benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in Face Amount, as
described below. In addition, a one-time administrative charge of $25 will be
deducted from Policy Value when the Rider is elected. Certain transactions,
including policy loans, partial withdrawals, and changes in Sum Insured Options,
can result in the termination of the Rider. If this Rider is terminated, it
cannot be reinstated.
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GUARANTEED DEATH BENEFIT TESTS
While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:
1. Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any Debt,
partial withdrawals and withdrawal charges, must be greater than the minimum
monthly payment multiplied by the number of months which have elapsed since
the relevant Date of Issue; and
2. On each Policy anniversary, (a) must exceed (b), where, since the Date of
Issue:
(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and Debt which is classified as a preferred loan; and
(b) is the sum of the minimum Guaranteed Death Benefit premiums, as shown on
the specifications page of the Policy.
GUARANTEED DEATH BENEFIT
If the Guaranteed Death Benefit Rider is in effect on the Final Premium Payment
Date, a guaranteed Death Benefit will be provided as long as the Rider is in
force. The Death Benefit will be the greater of:
- the Face Amount as of the Final Premium Payment Date; or
- the Policy Value as of the date due proof of death is received by the
Company.
TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER
The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:
- foreclosure of an outstanding loan; or
- the date on which the sum of your payments does not meet or exceed the
applicable Guaranteed Death Benefit test (above); or
- any Policy change that results in a negative guideline level premium; or
- the effective date of a change from the Adjustable Death Benefit Option to
the Level Death Benefit Option, if such changes occur within 5 policy
years of the Final Payment Date; or
- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.
It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates.
LEVEL OPTION AND ADJUSTABLE OPTION
The Policy provides two death benefit options: the Level Option and Adjustable
Option. You choose the desired option in the application or enrollment form. You
may change the option once per Policy year by written request. There is no
charge for a change in option.
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Under the Level Option, the death benefit is the GREATER of the:
- Face amount OR
- Guideline minimum sum insured
Under the Adjustable Option, the death benefit is the GREATER of the:
- Face amount plus policy value OR
- Guideline minimum sum insured
Under both the Level Option and Adjustable Option, the death benefit provides
insurance protection. Under the Level Option, the death benefit is level unless
the guideline minimum sum insured exceeds the face amount; then, the death
benefit varies as the policy value changes. Under the Adjustable Option, the
death benefit always varies as the policy value changes.
At any face amount, the death benefit will be greater under the Adjustable
Option than under the Level Option because the policy value is added to the face
amount and included in the death benefit. However, the monthly insurance
protection charge will be greater. Therefore, policy value will accumulate at a
slower rate than under the Level Option.
If you desire to have payments and investment performance reflected in the death
benefit, you should choose the Adjustable Option. If you desire to have payments
and investment performance reflected to the maximum extent in the policy value,
you should select the Level Option.
GUIDELINE MINIMUM SUM INSURED -- The Guideline Minimum Sum Insured is a
percentage of the policy value as set forth in APPENDIX A -- GUIDELINE MINIMUM
SUM INSURED TABLE. The Guideline Minimum Sum Insured is computed based on
federal tax regulations to ensure that the Policy qualifies as a life insurance
contract and that the insurance proceeds will be excluded from the gross income
of the beneficiary.
ILLUSTRATION OF THE LEVEL OPTION -- In this illustration, assume that the
Insured is under the age of 40, and that there is no outstanding loan.
Under the Level Option, a Policy with a $100,000 face amount will have a death
benefit of $100,000. However, because the death benefit must be equal to or
greater than 250% of policy value, if the policy value exceeds $40,000 the death
benefit will exceed the $100,000 face amount. In this example, each dollar of
policy value above $40,000 will increase the death benefit by $2.50. For
example, a Policy with a policy value of $50,000 will have a guideline minimum
sum insured of $125,000 ($50,000 X 2.50); policy value of $60,000 will produce a
guideline minimum sum insured of $150,000 ($60,000 X 2.50); and policy value of
$75,000 will produce a guideline minimum sum insured of $187,500 ($75,000 X
2.50).
Similarly, if policy value exceeds $40,000, each dollar taken out of policy
value will reduce the death benefit by $2.50. If, for example, the policy value
is reduced from $60,000 to $50,000 because of partial withdrawals, charges or
negative investment performance, the death benefit will be reduced from $150,000
to $125,000. If, however, the product of the policy value times the applicable
percentage from the table in APPENDIX A is less than the face amount, the death
benefit will equal the face amount.
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
zero and 40), the applicable percentage would be 185%. The death benefit would
not exceed the $100,000 face amount unless the policy value exceeded $54,054
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(rather than $40,000), and each dollar then added to or taken from policy value
would change the death benefit by $1.85.
ILLUSTRATION OF THE ADJUSTABLE OPTION -- In this illustration, assume that the
Insured is under the age of 40 and that there is no outstanding loan.
Under the Adjustable Option, a Policy with a face amount of $100,000 will
produce a death benefit of $100,000 plus policy value. For example, a Policy
with policy value of $10,000 will produce a death benefit of $110,000 ($100,000
+ $10,000); policy value of $25,000 will produce a death benefit of $125,000
($100,000 + $25,000); policy value of $50,000 will produce a death benefit of
$150,000 ($100,000 + $50,000). However, the death benefit must be at least 250%
of the policy value. Therefore, if the policy value is greater than $66,667,
250% of that amount will be the death benefit, which will be greater than the
face amount plus policy value. In this example, each dollar of policy value
above $66,667 will increase the death benefit by $2.50. For example, if the
policy value is $70,000, the guideline minimum sum insured will be $175,000
($70,000 X 2.50); policy value of $80,000 will produce a guideline minimum sum
insured of $200,000 ($80,000 X 2.50); and policy value of $90,000 will produce a
guideline minimum sum insured of $225,000 ($90,000 X 2.50).
Similarly, if policy value exceeds $66,667, each dollar taken out of policy
value will reduce the death benefit by $2.50. If, for example, the policy value
is reduced from $80,000 to $70,000 because of partial withdrawals, charges or
negative investment performance, the death benefit will be reduced from $200,000
to $175,000. If, however, the product of the policy value times the applicable
percentage is less than the face amount plus policy value, then the death
benefit will be the current face amount plus policy 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 policy value. The death benefit would be the sum of the policy
value plus $100,000 unless the policy value exceeded $117,647 (rather than
$66,667). Each dollar added to or subtracted from the Policy would change the
death benefit by $1.85.
CHANGE TO LEVEL OR ADJUSTABLE OPTION
You may change the death benefit option once each Policy year by written
request. Changing options will not require evidence of insurability. The change
takes effect on the monthly processing date on or following the date of receipt
of the written request. We will impose no charge for changes in death benefit
options.
If you change the Level Option to the Adjustable Option, we will decrease the
face amount to equal:
- The death benefit MINUS
- The policy value on the date of the change
The change may not be made if the face amount would fall below $40,000. After
the change from the Level Option to the Adjustable Option, future monthly
insurance protection charges may be higher or lower than if no change in option
had been made. However, the insurance protection amount will always equal the
face amount unless the guideline minimum sum insured applies.
If you change the Adjustable Option to the Level Option, we will increase the
face amount by the policy value on the date of the change. The death benefit
will be the GREATER of:
- The new face amount or
- The guideline minimum sum insured
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After the change from the Adjustable Option to the Level Option, an increase in
policy value will reduce the insurance protection amount and the monthly
insurance protection charge. A decrease in policy value will increase the
insurance protection amount and the monthly insurance protection charge.
A change in death benefit option may result in total payments exceeding the then
current maximum payment limitation under federal tax law. If this occurs, we
will pay the excess to you.
A change from the Adjustable Death Benefit option to the Level Benefit option
within five policy years of the Final Payment Date will terminate a Guaranteed
Death Benefit Rider.
CHANGE IN FACE AMOUNT
You may increase or decrease the face amount by written request. An increase or
decrease in the face amount takes effect on the LATEST of the:
- The monthly processing date on or next following date of receipt of your
written request OR
- The date of approval of your written request, if evidence of insurability
is required
INCREASES -- You must submit with your written request for an increase
satisfactory evidence of insurability. The consent of the Insured is also
required whenever the face amount is increased. An increase in face amount may
not be less than $10,000. You may not increase the face amount after the Insured
reaches age 80. A written request for an increase must include a payment if the
surrender value is less than the sum of:
- $50 PLUS
- Two minimum monthly payments
On the effective date of each increase in face amount, we will deduct a
transaction charge of $50 from policy value for administrative costs. We will
also compute a surrender charge for the increase. An increase in the face amount
will increase the insurance protection amount and, therefore, the monthly
insurance protection charges.
After increasing the face amount, you will have the right, during a free-look
period, to have the increase canceled. See THE POLICY -- "Free-Look Period." If
you exercise this right, we will credit to your Policy the charges deducted for
the increase, unless you request a refund of these charges.
DECREASES -- You may decrease the face amount by written request. The minimum
amount for a decrease in face amount is $10,000. The minimum face amount in
force after a decrease is $40,000. We may limit the decrease or return policy
value to you, as you choose, if the Policy would not comply with the maximum
payment limitation under federal tax law. A return of policy value may result in
tax liability to you.
A decrease in the face amount will lower the insurance protection amount and,
therefore, the monthly insurance protection charge. In computing the monthly
insurance protection charge, a decrease in the face amount will reduce the face
amount in the following order:
- the Face Amount provided by the most recent increase;
- the next most recent increases successively; and
- the initial Face Amount
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On a decrease in the face amount, we will deduct from the policy value a
transaction charge of $50 and, if applicable, any surrender charge. You may
allocate the deduction to one sub-account. If you make no allocation, we will
make a pro-rata allocation. We will reduce the surrender charge by the amount of
any surrender charge deducted.
POLICY VALUE
The policy value is the total value of your Policy. It is the SUM of:
- Your accumulation in the fixed account PLUS
- The value of your units in the sub-accounts
There is no guaranteed minimum policy value. Policy value on any date depends on
variables that cannot be predetermined.
Your policy value is affected by the:
- Frequency and amount of your net payments
- Interest credited in the fixed account
- Investment performance of your sub-accounts
- Partial withdrawals
- Loans, loan repayments and loan interest paid or credited
- Charges and deductions under the Policy
- The death benefit option
COMPUTING POLICY VALUE -- We compute the policy value on the date of issue and
on each valuation date. On the date of issue, the policy value is:
- The value of the amount allocated to the money market fund, net of
mortality and expense risk charges, administrative charges and fund
expenses (see THE POLICY -- "Applying for a Policy"), MINUS
- The monthly insurance protection charge due
On each valuation date after the date of issue, the policy value is the SUM of:
- Accumulations in the fixed account PLUS
- The SUM of the PRODUCTS of:
- The number of units in each sub-account TIMES
- The value of a unit in each sub-account on the valuation date
THE UNIT -- We allocate each net payment to the sub-accounts you selected. We
credit allocations to the sub-accounts as units. Units are credited separately
for each sub-account.
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The number of units of each sub-account credited to the Policy is the QUOTIENT
of:
- That part of the net payment allocated to the sub-account DIVIDED BY
- The dollar value of a unit on the valuation date the payment is received
at our principal office
The number of units will remain fixed unless changed by a split of unit value,
transfer, partial withdrawal or surrender. Also, each deduction of charges from
a sub-account will result in cancellation of units equal in value to the amount
deducted.
The dollar value of a unit of a sub-account varies from valuation date to
valuation date based on the investment experience of that sub-account. This
investment experience reflects the investment performance, expenses and charges
of the fund in which the sub-account invests. The value of each unit was set at
$1.00 on the first valuation date of each sub-account. The value of a unit on
any valuation date is the PRODUCT of:
- The dollar value of the unit on the preceding valuation date TIMES
- The net investment factor
NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a sub-account during the valuation period just ended. The net
investment factor for each sub-account is 1.0000 PLUS the QUOTIENT of:
- The investment income of that sub-account for the valuation period,
adjusted for realized and unrealized capital gains and losses and for
taxes during the valuation period, DIVIDED BY
- The value of that sub-account's assets at the beginning of the valuation
period MINUS
- The mortality and expense risk charge for each day in the valuation period
currently at an annual rate of 0.65% of the daily net asset value of that
sub-account AND
- The administrative charge for each day in the valuation period at an
annual rate of 0.15% of the daily net asset value of that sub-account
(only during the first ten Policy years)
The net investment factor may be greater or less than one.
PAYMENT OPTIONS
The net death benefit payable may be paid in a single sum or under one or more
of the payment options then offered by the Company. See APPENDIX C -- PAYMENT
OPTIONS. These payment options also are available at the final payment date or
if the Policy is surrendered. If no election is made, we will pay the net death
benefit in a single sum.
OPTIONAL INSURANCE BENEFITS
You may add optional insurance benefits to the Policy by Rider, as described in
APPENDIX B -- OPTIONAL INSURANCE BENEFITS. The cost of certain optional
insurance benefits becomes part of the monthly insurance protection charge.
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SURRENDER
You may surrender the Policy and receive its surrender value. The surrender
value is:
- The policy value MINUS
- Any outstanding loan and surrender charges
We will compute the surrender value on the valuation date on which we receive
the Policy with a written request for surrender. We will deduct a surrender
charge if you surrender the Policy within 10 full Policy years of the date of
issue or increase in face amount. See CHARGES AND DEDUCTIONS -- "Surrender
Charge."
The surrender value may be paid in a lump sum or under a payment option then
offered by us. See APPENDIX C -- PAYMENT OPTIONS. We will normally pay the
surrender value within seven days following our receipt of written request. We
may delay benefit payments under the circumstances described in OTHER POLICY
PROVISIONS -- "Delay of Payments."
For important tax consequences of a surrender, see FEDERAL TAX CONSIDERATIONS.
If the Policy is issued in connection with a Section 403(b) Plan, your surrender
rights may be restricted. See FEDERAL TAX CONSIDERATIONS -- "Policies Issued in
Connection with TSA Plans."
PARTIAL WITHDRAWAL
After the first Policy year, you may withdraw part of the surrender value of
your Policy on written request. Your written request must state the dollar
amount you wish to receive. You may allocate the amount withdrawn among the
sub-accounts and the fixed account. If you do not provide allocation
instructions, we will make a pro-rata allocation. Each partial withdrawal must
be at least $500. Under the Level Option, the face amount is reduced by the
partial withdrawal. We will not allow a partial withdrawal if it would reduce
the Level Option face amount below $40,000.
On a partial withdrawal from a sub-account, we will cancel the number of units
equal in value to the amount withdrawn. The amount withdrawn will be the amount
you requested plus the partial withdrawal costs. See CHARGES AND DEDUCTIONS --
"Partial Withdrawal Costs." We will normally pay the partial withdrawal within
seven days following our receipt of written request. We may delay payment as
described in OTHER POLICY PROVISIONS -- "Delay of Payments."
For important tax consequences of partial withdrawals, see FEDERAL TAX
CONSIDERATIONS. If the Policy is issued in connection with a Section
403(b) Plan, your withdrawal rights may be restricted. See FEDERAL TAX
CONSIDERATIONS -- "Policies Issued in Connection with TSA Plans."
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, up to the face amount of the Policy, 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 policies) with increases in the tables
for non-standard risks. Interest will not be less than 4.5%.
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IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING POLICY 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 policy value from the fixed account back to
the variable 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 Policy 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 loan. We will transfer the policy value in the variable
account to the fixed account on the date we receive written request to elect the
option.
On election of paid-up insurance, the Policy often will become a modified
endowment contract. If a Policy becomes a modified endowment contract, Policy
loans or surrender will receive unfavorable federal tax treatment. See FEDERAL
TAX CONSIDERATIONS -- "Modified Endowment Policies."
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CHARGES AND DEDUCTIONS
The following charges will apply to your Policy under the circumstances
described. Some of these charges apply throughout the Policy's duration. Other
charges apply only if you choose options under the Policy.
No surrender charges, partial withdrawal charges or front-end sales loads are
imposed, and no commissions are paid where the Policy owner as of the date of
application is within the following class of individuals:
All employees of First Allmerica and its affiliates and subsidiaries located at
First Allmerica's home office (or at off-site locations if such employees are on
First Allmerica's home office payroll); directors of First Allmerica and its
affiliates and subsidiaries; all employees and registered representatives of any
broker-dealer that has entered into a sales agreement with us or Allmerica
Investments, Inc. to sell the Policies and any spouses of the above persons or
any children of the above persons.
PAYMENT EXPENSE CHARGE
Currently, we deduct 4.0% of each payment as a payment expense charge. This
charge includes a:
- Current premium tax deduction of 2.5%
- Current deferred acquisition costs ("DAC tax") deduction of 1.0%
- Front-end sales load of 0.5%
The 2.5% premium tax deduction approximates our average expenses for state and
local premium taxes. Premium taxes vary, ranging from zero to more than 4.0%.
The premium tax deduction is made whether or not any premium tax applies. The
deduction may be higher or lower than the premium tax imposed. However, we do
not expect to make a profit from this deduction. The 1.0% DAC tax deduction
helps reimburse us for approximate expenses incurred from federal taxes for
deferred acquisition costs ("DAC taxes") of the Policies. We deduct the 0.5%
front-end sales load from each payment partially to compensate us for Policy
sales expenses.
We reserve the right to increase or decrease the premium tax deduction or DAC
tax deduction to reflect changes in our expenses for premium taxes or DAC taxes.
The 0.5% front-end sales load will not change, even if sales expenses change.
MONTHLY INSURANCE PROTECTION CHARGES
Before the final payment date, we will deduct a monthly insurance protection
charge from your policy value. This charge is the cost for insurance protection
under the Policy, including optional insurance benefits provided by Rider.
We deduct the monthly insurance protection charge on each monthly processing
date starting with the date of issue. You may allocate monthly insurance
protection charges to one sub-account. If you make no allocation, we will make a
pro-rata allocation. If the sub-account you chose does not have sufficient funds
to cover the monthly insurance protection charges, we will make a pro-rata
allocation. We will deduct no monthly insurance protection charges on or after
the final payment date.
COMPUTING MONTHLY INSURANCE PROTECTION CHARGES -- We designed the monthly
insurance protection charge to compensate us for the anticipated cost of paying
net death benefits under the Policies. The charge is computed monthly for the
initial face amount and for each increase in face amount. Monthly insurance
protection charges can vary.
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For the initial face amount under the Level Option, the monthly insurance
protection charge is the PRODUCT of:
- The insurance protection rate TIMES
- The DIFFERENCE between
- The initial face amount AND
- The policy value (MINUS any Rider charges) at the beginning of the
Policy month
Under the Level Option, the monthly insurance protection charge decreases as the
policy value increases if the guideline minimum sum insured is not in effect.
For the initial face amount under the Adjustable Option, the monthly insurance
protection charge is the PRODUCT of:
- The insurance protection rate TIMES
- The initial face amount
For each increase in face amount under the Level Option, the monthly insurance
protection charge is the PRODUCT of:
- The insurance protection rate for the increase TIMES
- The DIFFERENCE between
- The increase in face amount AND
- Any policy value (MINUS any Rider charges) GREATER than the initial
face amount at the beginning of the Policy month and not allocated to a
prior increase
For each increase in face amount under the Adjustable Option, the monthly
insurance protection charge is the PRODUCT of:
- The insurance protection rate for the increase TIMES
- The increase in face amount
If the guideline minimum sum insured is in effect under either Option, we will
compute a monthly insurance protection charge for that part of the death benefit
subject to the guideline minimum sum insured that exceeds the current death
benefit not subject to the guideline minimum sum insured. This charge is the
PRODUCT of:
- The insurance protection rate for the initial face amount TIMES
- The DIFFERENCE between
- The guideline minimum sum insured AND
- The GREATER of:
- The face amount OR the policy value, if you selected the Level Option
or
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- The face amount PLUS the policy value, if you selected the Adjustable
Option
We will adjust the monthly insurance protection charge for any decreases in face
amount. See THE POLICY -- "Change in Face Amount: DECREASES."
INSURANCE PROTECTION RATES -- We base insurance protection rates on the:
- Male, female or blended unisex rate table
- Age and underwriting class of the Insured
- Effective date of an increase or date of any Rider
For unisex Policies, sex-distinct rates do not apply. For the initial face
amount, the insurance protection rates are based on your age at the beginning of
each Policy year. For an increase in face amount or for a Rider, the insurance
protection rates are based on your age on each anniversary of the effective date
of the increase or Rider. We base the current insurance protection rates on our
expectations as to future mortality experience. Rates will not, however, be
greater than the guaranteed insurance protection rates set forth in the Policy.
These guaranteed rates are based on the Commissioners 1980 Standard Ordinary
Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex Policies)
and the Insured's sex and age. The Tables used for this purpose set forth
different mortality estimates for males and females and for smokers and
non-smokers. Any change in the insurance protection rates will apply to all
Insureds of the same age, sex and underwriting class whose Policies have been in
force for the same period.
The underwriting class of an Insured will affect the insurance protection rates.
We currently place Insureds into preferred underwriting classes, standard
underwriting classes and non-standard underwriting classes. The underwriting
classes are also divided into two categories: smokers and non-smokers. We will
place an Insured under age 18 at the date of issue in a standard or non-standard
underwriting class. We will then classify the Insured as a smoker at age 18
unless we receive satisfactory evidence that the Insured is a non-smoker. Prior
to the Insured's age 18, we will give you notice of how the Insured may be
classified as a non-smoker.
We compute the insurance protection rate separately for the initial face amount
and for any increase in face amount. However, if the Insured's underwriting
class improves on an increase, the lower insurance protection rate will apply to
the total face amount.
CHARGES AGAINST OR REFLECTED IN THE ASSETS OF THE VARIABLE ACCOUNT
We assess each sub-account with a charge for mortality and expense risks we
assume and, during the first ten Policy years, a charge for administrative
expenses of the variable account. Fund expenses are also reflected in the
variable account.
ADMINISTRATIVE CHARGE -- During the first ten Policy years, we impose a daily
charge at an annual rate of 0.15% of the average daily net asset value in each
sub-account. The charge is to help reimburse us for administrative expenses
incurred in the administration of the variable account and the sub-accounts. It
is not expected to be a source of profit. The administrative functions and
expenses we assume for the variable account and the sub-accounts include:
- Clerical, accounting, actuarial and legal services
- Rent, postage, telephone, office equipment and supplies
- The expenses of preparing and printing registration statements and
prospectuses (not allocable to sales expense)
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- Regulatory filing fees and other fees
We do not assess the administrative charge after the tenth Policy year.
MORTALITY AND EXPENSE RISK CHARGE -- We impose a daily charge at a current
annual rate of 0.65% of the average daily net asset value of each sub-account.
This charge compensates us for assuming mortality and expense risks for variable
interests in the Policies. The Company may increase this charge, subject to
state and federal law, to an annual rate no greater than 0.80%.
The mortality risk we assume is that Insureds may live for a shorter time than
anticipated. If this happens, we will pay more net death benefits than
anticipated. The expense risk we assume is that the expenses incurred in issuing
and administering the Policies will exceed those compensated by the
administrative charges in the Policies. If the charge for mortality and expense
risks is not sufficient to cover mortality experience and expenses, we will
absorb the losses. If the charge turns out to be higher than mortality and
expense risk expenses, the difference will be a profit to us. If the charge
provides us with a profit, the profit will be available for our use to pay
distribution, sales and other expenses.
FUND EXPENSES -- The value of the units of the sub-accounts will reflect the
investment advisory fee and other expenses of the funds whose shares the
sub-accounts purchase. The prospectuses and statements of additional information
of the Trust, Fidelity VIP and T. Rowe Price contain more information concerning
the fees and expenses.
No charges are currently made against the sub-accounts for federal or state
income taxes. Should income taxes be imposed, we may make deductions from the
sub-accounts to pay the taxes. See FEDERAL TAX CONSIDERATIONS.
SURRENDER CHARGE
The Policy's contingent surrender charge is a deferred administrative charge and
a deferred sales charge. The deferred administrative charge is designed to
reimburse us for the administrative costs of product research and development,
underwriting, Policy administration and surrendering the Policy. The deferred
sales charge compensates us for distribution expenses, including commissions to
our representatives, advertising and the printing of prospectuses and sales
literature.
We compute the surrender charge on date of issue and on any increase in face
amount. The surrender charge applies for ten years from date of issue or
increase in face amount. We impose the surrender charge only if, during its
duration, you request a full surrender or a decrease in face amount.
The maximum surrender charge includes a:
- Deferred administrative charge of $8.50 per thousand dollars of the
initial face amount or increase
- Deferred sales charge of 28.5% of payments received or associated with the
increase up to the guideline annual premium for the increase
The maximum surrender charge will not exceed a specified amount per $1,000 of
initial face amount or increase because of state-imposed limits. The maximum
surrender charge is level for the first 24 Policy months and then reduces by
1/96th for the next 96 Policy months, reaching zero at the end of ten Policy
years.
Payments associated with an increase equal that part of the payments made on or
after the increase that are allocated to the increase. We allocate payments
based on relative guideline annual premium payments. For example, assume that
the guideline annual premium is $1,500 before an increase and is $2,000 with the
increase. The policy value on the effective date of the increase would be
allocated 75% ($1,500/$2,000) to the
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initial face amount and 25% to the increase. All future payments would also be
allocated 75% to the initial face amount and 25% to the increase.
If more than one surrender charge is in effect because of one or more increases
in face amount, we will apply the surrender charges in inverse order. We will
apply surrender and partial withdrawal charges (described below) in this order:
- First, the most recent increase
- Second, the next most recent increases, and so on
- Third, the initial face amount.
A surrender charge may be deducted on a decrease in the face amount. On a
decrease, the surrender charge deducted is a fraction of the charge that would
apply to a full surrender. The fraction is the PRODUCT of:
- The decrease DIVIDED by the current face amount TIMES
- the surrender charge
Where a decrease causes a partial reduction in an increase or in the initial
face amount, we will deduct a proportionate share of the surrender charge for
that increase or for the initial face amount.
See APPENDIX E -- CALCULATION OF MAXIMUM SURRENDER CHARGES for examples of how
we compute the maximum surrender charge.
PARTIAL WITHDRAWAL COSTS
For each partial withdrawal, we deduct a transaction fee of 2.0% of the amount
withdrawn, not to exceed $25. This fee is intended to reimburse us for the cost
of processing the withdrawal. The transaction fee applies to all partial
withdrawals, including a Withdrawal without a surrender charge (described
below).
A partial withdrawal charge may also be deducted from policy value. However, in
any Policy year, you may withdraw, without a partial withdrawal charge, up to:
- 10% of the policy value MINUS
- The total of any prior free withdrawals in the same Policy year ("Free 10%
Withdrawal")
The right to make the Free 10% Withdrawal is not cumulative from Policy year to
Policy year. For example, if only 8% of policy value were withdrawn in the
second Policy year, the amount you could withdraw in future Policy years would
not be increased by the amount you did not withdraw in the second Policy year.
We impose the partial withdrawal charge on any withdrawal greater than the Free
10% Withdrawal. The charge is 5.0% of the excess withdrawal up to the surrender
charge. If no surrender charge applies on withdrawal, no partial withdrawal
charge will apply. We will reduce the Policy's outstanding surrender charge by
the partial withdrawal charge deducted, proportionately reducing the deferred
sales and administrative charges. The partial withdrawal charge deducted will
decrease existing surrender charges in inverse order.
TRANSFER CHARGES
Currently, the first 12 transfers in a Policy year are free. We reserve the
right to limit the number of free transfers in a Policy year to six. After that,
we will deduct a $10 transfer charge from amounts transferred in
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that Policy year. We reserve the right to increase the charge, but it will never
exceed $25. This charge reimburses us for the administrative costs of processing
the transfer.
If you apply for automatic transfers, the first automatic transfer counts as one
transfer. Each future automatic transfer is without charge and does not reduce
the remaining number of transfers that may be made without charge.
Each of the following transfers of policy value from the sub-accounts to the
fixed account is free and does not count as one of the 12 free transfers in a
Policy year:
- A conversion within the first 24 months from date of issue or increase
- A transfer to the fixed account to secure a loan
- A reallocation of policy value within 20 days of the date of issue
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in face amount, we will deduct a transaction
charge of $50 from policy value to reimburse us for the administrative costs of
the change.
OTHER ADMINISTRATIVE CHARGES
We reserve the right to charge for other administrative costs we incur. While
there are no current charges for these costs, we may impose a charge for:
- Changing net payment allocation instructions
- Changing the allocation of monthly insurance protection charges among the
various sub-accounts and the fixed account
- Providing a projection of values
We do not currently charge for these costs. Any future charge is guaranteed not
to exceed $25 per transaction.
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POLICY LOANS
You may borrow money secured by your policy value. The total amount you may
borrow, including any outstanding loan, is the loan value. In the first Policy
year, the loan value is 75% of:
- The policy value MINUS
- Any surrender charges, unpaid monthly insurance protection charges and
outstanding loan interest through the end of the Policy year
After the first Policy year, the loan value is 90% of:
- The policy value MINUS
- Any surrender charges
There is no minimum loan. We will usually pay the loan within seven days after
we receive the written request. We may delay the payment of loans as stated in
OTHER POLICY PROVISIONS -- "Delay of Payments."
We will allocate the loan among the sub-accounts and the fixed account according
to your instructions. If you do not make an allocation, we will make a pro-rata
allocation. We will transfer policy value in each sub-account equal to the
Policy loan to the fixed account. We will not count this transfer as a transfer
subject to the transfer charge.
Policy value equal to the outstanding loan will earn monthly interest in the
fixed account at an annual rate of at least 6.0% (currently 8.0% for preferred
loans). NO OTHER INTEREST WILL BE CREDITED.
If you are a participant under a Section 403(b) TSA plan and purchased the
Policy in connection with the plan, your Policy loan rights are limited. See
"Policies Issued in Connection with TSA Plans" below, and FEDERAL TAX
CONSIDERATIONS -- "Policies Issued in Connection with TSA Plans."
PREFERRED LOAN OPTION
This option is available to you upon written request after the first Policy
year. You may change a preferred loan to a non-preferred loan at any time upon
written request. It may be revoked by you at any time. A request for a preferred
loan after the Final Payment Date will terminate the optional Guaranteed Death
Benefit Rider.
The preferred loan option is available during Policy years 2-10 only if your
policy value, minus the surrender charge, is $50,000 or more. The option applies
to up to 10% of this amount. After the 10th Policy year, the preferred loan
option is available on all loans or on all or a part of the loan value as you
request. The guaranteed annual interest rate credited to the policy value
securing a preferred loan will be 8%.
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Policy. Consult a qualified tax
adviser (and see FEDERAL TAX CONSIDERATIONS).
LOAN INTEREST CHARGED
Interest accrues daily at the annual rate of 8.0%. Interest is due and payable
in arrears at the end of each Policy year or for as short a period as the loan
may exist. Interest not paid when due will be added to the loan amount and bears
interest at the same rate.
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REPAYMENT OF OUTSTANDING LOAN
You may pay any loans before Policy lapse. We will allocate that part of the
policy value in the fixed account that secured a repaid loan to the sub-accounts
and fixed account according to your instructions. If you do not make a repayment
allocation, we will allocate policy value according to your most recent payment
allocation instructions. However, loan repayments allocated to the variable
account cannot exceed policy value previously transferred from the variable
account to secure the outstanding loan.
If the outstanding loan exceeds the policy value less the surrender charge, the
Policy will terminate. We will mail a notice of termination 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 Policy will terminate with no value. See
POLICY TERMINATION AND REINSTATEMENT. The foreclosure of an outstanding loan
will terminate the optional Guaranteed Death Benefit Rider.
EFFECT OF POLICY LOANS
Policy loans will permanently affect the policy value and surrender value, and
may permanently affect the death benefit. The effect could be favorable or
unfavorable, depending on whether the investment performance of the sub-accounts
is less than or greater than the interest credited to the policy value in the
fixed account that secures the loan.
We will deduct any outstanding loan from the proceeds payable when the Insured
dies or from a surrender.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
If your Policy was issued in connection with a TSA plan, Policy loans are
permitted in accordance with the terms of the Policy. However, if a Policy loan
does not comply with the requirements of Code Section 72(p), the TSA plan may
become disqualified and Policy Values may be includible in your current income.
Policy loans must meet the following additional requirements:
- Loans must be repaid within five years, except when the loan is used to
acquire any dwelling unit which within a reasonable time is to be used as
the Policy owner's principal residence.
- All Policy loans must be amortized on a level basis with loan repayments
being made not less frequently than quarterly.
- The sum of all outstanding loan balances for all loans from all of your
TSA plans may not exceed the lesser of:
- $50,000 reduced by the excess (if any) of
- the highest outstanding balance of loans from all of the Policy
owner's TSA plans during the one-year period preceding the date of the
loan, MINUS
- the outstanding balance of loans from the Policy owner's TSA plans on
the date on which such loan was made;
OR
- 50% of the Policy owner's non-forfeitable accrued benefit in all of
his/her TSA plans, but not less than $10,000.
See FEDERAL TAX CONSIDERATIONS -- "Policies Issued in Connection with TSA
Plans."
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A QUALIFIED TAX ADVISER SHOULD BE CONSULTED BEFORE REQUESTING A POLICY LOAN.
POLICY TERMINATION AND REINSTATEMENT
TERMINATION
Unless the Guaranteed Death Benefit Rider is in effect, the Policy will
terminate if:
- Surrender value is insufficient to cover the next monthly insurance
protection charge plus loan interest accrued OR
- Outstanding loan exceeds the policy value less surrender charges
If one of these situations occurs, the Policy will be in default. You will
then have a grace period of 62 days, measured from the date of default, to
pay a premium sufficient to prevent termination. On the date of default, we
will send a notice to you and to any assignee of record. The notice will
state the premium due and the date by which it must be paid.
Failure to pay a sufficient premium within the grace period will result in
Policy termination. If the Insured dies during the grace period, we will
deduct from the net death benefit any monthly insurance protection charges
due and unpaid through the Policy month in which the Insured dies and any
other overdue charge.
During the first 48 Policy months following the date of issue or an increase
in the face amount, a guarantee may apply to prevent the Policy from
terminating because of insufficient surrender value. This guarantee applies
if, during this period, you pay premiums that, when reduced by partial
withdrawals and partial withdrawal costs, equal or exceed specified minimum
monthly payments. The specified minimum monthly payments are based on the
number of months the Policy, increase in face amount or policy change that
causes a change in the minimum monthly payment has been in force. A policy
change that causes a change in the minimum monthly payment is a change in
the face amount or the addition or deletion of a Rider. Except for the first
48 months after the date of issue or the effective date of an increase,
payments equal to the minimum monthly payment do not guarantee that the
Policy will remain in force.
If the optional Guaranteed Death Benefit Rider is in effect, the Policy will
not lapse regardless of the investment performance of the Variable Account.
See "Guaranteed Death Benefit Rider."
REINSTATEMENT
A terminated Policy may be reinstated within three years of the date of
default and before the final payment date. The reinstatement takes effect on
the monthly processing date following the date you submit to us:
- Written application for reinstatement
- Evidence of insurability showing that the Insured is insurable
according to our underwriting rules and
- A payment that, after the deduction of the payment expense charge, is
large enough to cover the minimum amount payable
Policies which have been surrendered may not be reinstated.
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MINIMUM AMOUNT PAYABLE -- If reinstatement is requested when less than 48
monthly insurance protection charges have been paid since the date of issue
or increase in the face amount, you must pay the lesser of:
- The minimum monthly payment for the three months beginning on the date
of reinstatement or
- the SUM of:
- The amount by which the surrender charge on the date of
reinstatement exceeds the policy value on the date of default PLUS
- Monthly insurance protection charges for the three months beginning
on the date of reinstatement
If you request reinstatement more than 48 monthly processing dates from the
date of issue or increase in the face amount, you must pay the sum shown
above without regard to the three months of minimum monthly payments.
SURRENDER CHARGE -- The surrender charge on the date of reinstatement is the
surrender charge that would have been in effect had the Policy remained in
force from the date of issue.
POLICY VALUE ON REINSTATEMENT -- The policy value on the date of
reinstatement is:
- The net payment made to reinstate the Policy and interest earned from
the date the payment was received at our principal office PLUS
- The policy value less any outstanding loan on the date of default (not
to exceed the surrender charge on the date of reinstatement) MINUS
- The monthly insurance protection charges due on the date of
reinstatement
You may reinstate any outstanding loan.
OTHER POLICY PROVISIONS
POLICY OWNER
The Policy Owner is the Insured unless another Policy owner has been named
in the application or enrollment form. As Policy owner, you are entitled to
exercise all rights under your Policy while the Insured is alive, with the
consent of any irrevocable beneficiary. The consent of the Insured is
required whenever the face amount is increased.
BENEFICIARY
The beneficiary is the person or persons to whom the net death benefit is
payable on the Insured's death. Unless otherwise stated in the Policy, the
beneficiary has no rights in the Policy before the Insured dies. While the
Insured is alive, you may change the beneficiary, unless you have declared
the beneficiary to be irrevocable. If no beneficiary is alive when the
Insured dies, the Policy owner (or the Policy owner's estate) will be the
beneficiary. If more than one beneficiary is alive when the Insured dies, we
will pay each beneficiary 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 proportionally.
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ASSIGNMENT
You may assign a Policy as collateral or make an absolute assignment. All
Policy rights will be transferred as to the assignee's interest. The consent
of the assignee may be required to make changes in payment allocations, make
transfers or to exercise other rights under the Policy. We are not bound by
an assignment or release thereof, unless it is in writing and recorded at
our Principal Office. When recorded, the assignment will take effect on the
date the written request was signed. Any rights the assignment creates will
be subject to any payments we made or actions we took before the assignment
is recorded. We are not responsible for determining the validity of any
assignment or release.
THE FOLLOWING POLICY PROVISIONS MAY VARY BY STATE.
LIMIT ON RIGHT TO CHALLENGE POLICY
We cannot challenge the validity of your Policy if the Insured was alive
after the Policy had been in force for two years from the date of issue.
Also, we cannot challenge the validity of any increase in the face amount if
the Insured was alive after the increase was in force for two years from the
effective date of the increase.
SUICIDE
The net death benefit will not be paid if the Insured commits suicide, while
sane or insane, within two years from the date of issue. Instead, we will
pay the beneficiary all payments made for the Policy, without interest, less
any outstanding loan and partial withdrawals. If the Insured commits
suicide, while sane or insane, within two years from any increase in face
amount, we will not recognize the increase. We will pay to the beneficiary
the monthly insurance protection charges paid for the increase.
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex is not correctly stated in the Policy
application or enrollment form, we will adjust benefits under the Policy to
reflect the correct age and sex. The adjusted benefit will be the benefit
that the most recent monthly insurance protection charge would have
purchased for the correct age and sex. We will not reduce the death benefit
to less than the guideline minimum sum insured. For a unisex Policy, there
is no adjusted benefit for misstatement of sex.
DELAY OF PAYMENTS
Amounts payable from the variable account for surrender, partial
withdrawals, net death benefit, Policy loans and transfers may be postponed
whenever:
- The New York Stock Exchange is closed other than customary weekend and
holiday closings
- The SEC restricts trading on the New York Stock Exchange
- The SEC determines an emergency exists, so that disposal of securities
is not reasonably practicable or it is not reasonably practicable to
compute the value of the variable account's net assets
We may delay paying any amounts derived from payments you made by check
until the check has cleared your bank.
We reserve the right to defer amounts payable from the fixed account. This
delay may not exceed six months.
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FEDERAL TAX CONSIDERATIONS
The following summary of federal tax considerations is based on our
understanding of the present federal income tax laws as they are currently
interpreted. Legislation may be proposed which, if passed, could adversely
and possibly retroactively affect the taxation of the Policies. This summary
is not exhaustive, does not purport to cover all situations, and is not
intended as tax advice. We do not address tax provisions that may apply if
the Policy owner is a corporation or the trustee of an employee benefit
plan. You should consult a qualified tax adviser to apply the law to your
circumstances.
THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the
Code. We file a consolidated tax return with our parent and affiliates. We
do not currently charge for any income tax on the earnings or realized
capital gains in the variable account. We do not currently charge for
federal income taxes respecting the variable account. A charge may apply in
the future for any federal income taxes we incur. The charge may become
necessary, for example, if there is a change in our tax status. Any charge
would be designed to cover the federal income taxes on the investment
results of the variable account.
Under current laws, the Company may incur state and local taxes besides
premium taxes. These taxes are not currently significant. If there is a
material change in these taxes affecting the variable account, we may charge
for taxes paid or for tax reserves.
TAXATION OF THE POLICIES
We believe that the Policies described in this Prospectus are life insurance
contracts under Section 7702 of the Code. Section 7702 affects the taxation
of life insurance contracts and places limits on the relationship of the
policy value to the death benefit. So long as the Policies are life
insurance contracts, the net death benefits of the Policies are excludable
from the gross income of the beneficiaries. Also, any increase in policy
value is not taxable until received by you or your designee (but see
"Modified Endowment Policies").
Federal tax law requires that the investment of each sub-account funding the
Policies be adequately diversified according to Treasury regulations.
Although we do not have control over the investments of the funds, we
believe that the funds currently meet the Treasury's diversification
requirements. We will monitor continued compliance with these requirements.
The Treasury Department has announced that previous regulations on
diversification do not provide guidance concerning the extent to which
Policy owners may direct their investments to divisions of a separate
investment account. Regulations may provide guidance in the future. The
Policies or our administrative rules may be modified as necessary to prevent
a Policy owner from being considered the owner of the assets of the variable
account.
A surrender, partial withdrawal, change in the death benefit option, change
in the face amount, lapse with Policy loan outstanding, or assignment of the
Policy may have tax consequences. Within the first fifteen Policy years, a
distribution of cash required under Section 7702 of the Code because of a
reduction of benefits under the Policy will be taxed to the Policy owner as
ordinary income respecting any investment earnings. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or
receipt of Policy proceeds depend on the circumstances of each Insured,
policy owner or beneficiary.
POLICY LOANS
We believe that non-preferred loans received under the Policy will be
treated as an indebtedness of the Policy Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Policy Owner while the Policy is in force (but see "Modified Endowment
Policies"). There is a risk, however, that a preferred loan may be
characterized by the Internal Revenue Service ("IRS") as a withdrawal and
taxed accordingly. At the present time, the IRS has not issued any guidance
on whether
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loans 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 IRS guidelines are
issued in the future, you may convert your preferred loan to a non-preferred
loan. However, it is possible that, notwithstanding the conversion, some or
all of the loan could be treated as a taxable withdrawal from the Policy.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is
not tax deductible. Generally, no tax deduction for interest is allowed on
Policy 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 business-owned policies covering officers or 20-percent
owners, up to a maximum equal to 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.
POLICIES ISSUED IN CONNECTION WITH TSA PLANS
The Policies may be issued in connection with tax-sheltered annuity ("TSA")
plans of certain public school systems and organizations that are tax exempt
under Section 501(c)(3) of the Code.
A Policy issued in connection with a TSA Plan will be endorsed to reflect
the restrictions under Section 403(b) of the Code. The Policy Owner may
terminate the endorsement at any time. However, the termination of the
endorsement may cause the Policy to fail to qualify under Section 403(b) of
the Code. A Policy issued in connection with a TSA Plan may also have
limitations on Policy loans. See POLICY LOANS -- "Policies Issued in
Connection with TSA Plans."
Under the provisions of Section 403(b) of the Code, payments made for
annuity policies purchased for employees under TSA plans are excludable from
the gross income of such employees, to the extent that the aggregate
purchase payments in any year do not exceed the maximum contribution
permitted under the Code. The Company has received a Private Letter Ruling
with respect to the status of the Policies as providing "incidental life
insurance" when issued in connection with TSA plans. In the Private Letter
Ruling, the IRS has taken the position that the purchase of a life insurance
policy by the employer as part of a TSA plan will not violate the
"incidental benefit" rules of Section 403(b) and the regulations thereunder.
The Private Letter Ruling also stated that the use of current or accumulated
contributions to purchase a life insurance policy will not result in current
taxation of the premium payments for the life insurance policy, except for
the current cost of the life insurance protection.
A Policy qualifying under Section 403(b) of the Code must provide that
withdrawals or other distributions attributable to salary reduction
contributions (including earnings) may not begin before the employee attains
age 59 1/2, separates from service, dies, or becomes disabled. In the case
of hardship, you may withdraw amounts contributed by salary reduction, but
not the earnings on such amounts. Even though a distribution may be
permitted under these rules (e.g., for hardship or after separation from
service), it may nonetheless be subject to a 10% penalty tax as a premature
distribution, in addition to income tax.
Policy loans are generally permitted in accordance with the terms of the
Policy, but there are certain additional limitations; see POLICY LOANS --
"Policies Issued in Connection with TSA Plans." However, if a Policy loan
does not comply with the requirements of Code Section 72(p), your TSA plan
may become disqualified and Policy values may be includible in current
income.
MODIFIED ENDOWMENT POLICIES
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, a Policy may be considered a
"modified endowment contract" if total payments during the first seven
Policy years (or within seven years of a material change in the Policy)
EXCEED the total net level payments payable had the Policy provided for
paid-up future benefits after making seven level annual payments. In
addition, if benefits are reduced at anytime during the life of the Policy,
there may be adverse tax consequences. Please consult your tax adviser.
48
<PAGE>
If the Policy is considered a modified endowment contract, distributions
(including Policy loans, partial withdrawals, surrenders and assignments)
will be taxed on an "income-first" basis and includible in gross income to
the extent that the surrender value exceeds the policy owner's investment in
the Policy. Any other amounts will be treated as a return of capital up to
the Policy Owner's basis in the Policy. A 10% additional tax is imposed on
that part of any distribution that is includible in income, unless the
distribution is:
- Made after the taxpayer becomes disabled,
- Made after the taxpayer attains age 59 1/2, or
- Part of a series of substantially equal periodic payments for the
taxpayer's life or life expectancy or joint life expectancies of the
taxpayer and beneficiary.
All modified endowment contracts issued by the same insurance company to the
same policy owner during any calendar period will be treated as a single
modified endowment contract in computing taxable distributions.
Currently, we review each Policy when payments are received to determine if
the payment will render the Policy a modified endowment contract. If a
payment would so render the Policy, we will notify you of the option of
requesting a refund of the excess payment. The refund process must be
completed within 60 days after the Policy anniversary or the Policy will be
permanently classified as a modified endowment contract.
VOTING RIGHTS
Where the law requires, we will vote fund shares that each sub-account holds
according to instructions received from Policy Owners with policy value in
the sub-account. If, under the 1940 Act or its rules, we may vote shares in
our own right, whether or not the shares relate to the Policies, we reserve
the right to do so.
We will provide each person having a voting interest in a fund with proxy
materials and voting instructions. We will vote shares held in each
sub-account for which no timely instructions are received in proportion to
all instructions received for the sub-account. We will also vote in the same
proportion our shares held in the variable account that do not relate to the
Policies.
We will compute the number of votes that a Policy owner has the right to
instruct on the record date established for the fund. This number is the
quotient of:
- Each Policy Owner's policy value in the sub-account divided by
- The net asset value of one share in the fund in which the assets of
the sub-account are invested
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that Fund shares be voted so
as (1) to cause to change in the sub-classification or investment objective
of one or more of the Funds, or (2) to approve or disapprove an investment
advisory contract for the Funds. In addition, we may disregard voting
instructions that are in favor of any change in the investment policies or
in any investment adviser or principal underwriter if the change has been
initiated by Contract Owners or the Trustees. Our 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 Funds. In the event we do
disregard voting instructions, a summary of and the reasons for that action
will be included in the next periodic report to Contract Owners.
49
<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), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller
Vice President and Corporate (since 1998) of First Allmerica
Controller
Mark R. Colborn Director (since 2000) and Vice President (since 1992)
Director and Vice President of First Allmerica.
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary
Secretary (since 1999) of Allmerica Investments, Inc.; and
Secretary (since 1999) of Allmerica Financial
Investment Management
Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First
Director, Vice President and Allmerica (since 2000); Vice President (1999) of
General Counsel Promos Hotel Corporation; Vice President & Deputy
General Counsel (1998-1999) of Legg Mason, Inc.; Vice
President and Deputy General Counsel (1995-1998) of
USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Chief and Vice President (since 1991) of First Allmerica;
Investment Officer Vice President (since 1998) of Allmerica Financial
Investment Management Services, Inc.; and President
(since 1995) and Director (since 1996) of Allmerica
Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens Insurance
Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since
Vice President and Treasurer 2000) of First Allmerica; Associate, Investment
Banking (1996-1997) of Merrill Lynch & Co.;
Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica
Investments, Inc., Allmerica Asset Management, Inc.
and Allmerica Financial Investment Management
Services, Inc.
John F. O'Brien Director, President and Chief Executive Officer
Director and Chairman of the Board (since 1989) of First Allmerica
Edward J. Parry, III Director and Chief Financial Officer (since 1996),
Director, Vice President Chief Vice President (since 1993), and Treasurer
Financial Officer (1993-2000) of First Allmerica
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director, President and Chief of First Allmerica; President (since 1995) of
Executive Officer Allmerica Financial Life Insurance and Annuity
Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
50
<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; Director (since 1998) of The Hanover
Insurance Company; Chief Executive Officer (1996 to
1998) of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly owned subsidiary of First
Allmerica, acts as the principal underwriter and general distributor of the
Policies. Allmerica Investments, Inc. is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. ("NASD"). Broker-dealers sell the Policies through their registered
representatives who are appointed by us.
We pay to broker-dealers who sell the Policy commissions based on a commission
schedule. After the date of issue or an increase in Face Amount, commissions
will be 90% of the first-year payments up to a payment amount we established and
4% of any excess. Commissions will be 2% for subsequent payments, plus 0.25% of
unloaned Policy value. To the extent permitted by NASD rules, overrides and
promotional incentives or payments may also be provided to General Agents,
independent marketing organizations, and 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 sale of
the Policies. These services may include the recruitment and training of
personnel, production of promotional literature, and similar services.
We intend to recoup commissions and other sales expenses through:
- The front-end sales load
- The deferred sales charge
- Investment earnings on amounts allocated under the Policies to the Fixed
Account
Commissions paid on the Policies, including other incentives or payments, are
not charged to Policy Owners or to the Variable Account.
REPORTS
We will maintain the records for the Variable Account. We will promptly send you
statements of transactions under your Policy, including:
- Payments
- Changes in Face Amount
- Changes in death benefit option
- Transfers among Sub-Accounts and the Fixed Account
- Partial withdrawals
51
<PAGE>
- Increases in loan amount or loan repayments
- Lapse or termination for any reason
- Reinstatement
We will send an annual statement to you that will summarize all of the above
transactions and deductions of charges during the Policy year. The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Contract. The Company will assume that all transactions are accurately reported
on confirmation statements and quarterly/ annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement. It will also set forth the status of the death benefit, Policy Value,
Surrender Value, amounts in the Sub-Accounts and Fixed Account, and any Policy
loans. We will send you reports containing financial statements and other
information for the Variable Account, the Trust, Fidelity VIP and T. Rowe Price
as the 1940 Act requires.
LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Variable Account or its
assets. The Company and Allmerica Investments, Inc. are not involved in any
litigation that is materially important to their total assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts. We may redeem
the shares of a Fund and substitute shares of another registered open-end
management company, if:
- The shares of the fund are no longer available for investment or
- In our judgment further investment in the Fund would be improper based on
the purposes of the Variable Account or the affected Sub-Account
Where the 1940 Act or other law requires, we will not substitute any shares
respecting a Policy interest in a sub-account without notice to Policy Owners
and prior approval of the SEC and state insurance authorities. The variable
account may, as the law allows, purchase other securities for other policies or
allow a conversion between policies on a Policy Owner's request.
We reserve the right to establish additional sub-accounts funded by a new fund
or by another investment company. Subject to law, we may, in our sole
discretion, establish new sub-accounts or eliminate one or more sub-accounts.
Shares of the funds are issued to other separate accounts of the Company and its
affiliates that fund variable annuity contracts ("mixed funding"). Shares of the
Portfolios of Fidelity VIP and T. Rowe Price are also issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policy Owners or variable annuity Policy Owners. The Company, the
Trust, Fidelity VIP and T. Rowe Price do not believe that mixed funding is
currently disadvantageous to either variable life insurance Policy Owners or
variable annuity Policy Owners. The Company and the Trustees will monitor events
to identify any material conflicts among Policy Owners because of mixed and
shared funding. If the Trustees conclude that separate funds should be
established for variable life and variable annuity separate accounts, we will
bear the expenses.
We may change the Policy to reflect a substitution or other change and will
notify Policy Owners of the change. Subject to any approvals the law may
require, the variable account or any sub-accounts may be:
52
<PAGE>
- Operated as a management company under the 1940 Act
- Deregistered under the 1940 Act if registration is no longer required or
- Combined with other sub-accounts or our other separate accounts
FURTHER INFORMATION
We have filed a 1933 Act registration statement for this offering with the SEC.
Under SEC rules and regulations, we have omitted from this Prospectus parts of
the registration statement and amendments. Statements contained in this
Prospectus are summaries of the Policy and other legal documents. The complete
documents and omitted information may be obtained from the SEC's principal
office in Washington, D.C., on payment of the SEC's prescribed fees.
MORE INFORMATION ABOUT THE FIXED ACCOUNT
This Prospectus serves as a disclosure document only for the aspects of the
Policy relating to the variable account. For complete details on the fixed
account, read the Policy itself. The fixed account and other interests in the
general account are not regulated under the 1933 Act or the 1940 Act because of
exemption and exclusionary provisions. The 1933 Act provisions on the accuracy
and completeness of statements made in prospectuses may apply to information on
the fixed part of the Policy and the fixed account. The SEC has not reviewed the
disclosures in this section of the Prospectus.
GENERAL DESCRIPTION
You may allocate part or all of your net payments to accumulate at a fixed rate
of interest in the fixed account. The fixed account is a part of our general
account. The general account is made up of all of our general assets other than
those allocated to any separate account. Allocations to the fixed account become
part of our general account assets and are used to support insurance and annuity
obligations.
FIXED ACCOUNT INTEREST AND POLICY LOANS
We guarantee amounts allocated to the fixed account as to principal and a
minimum rate of interest. The minimum interest we will credit on amounts
allocated to the fixed account is 4.0% compounded annually. "Excess interest"
may or may not be credited at our sole discretion. We will guarantee initial
rates on amounts allocated to the fixed account, either as payments or
transfers, to the next Policy anniversary. At each Policy anniversary, we will
credit the then current interest rate to money remaining in the fixed account.
We will guarantee this rate for one year. Thus, if a payment has been allocated
to the Fixed Account for less than one Policy year, the interest rate credited
to such payment may be greater or less than the interest rate credited to
payments that have been allocated to the Policy for more than one Policy year.
Policy loans may also be made from the policy value in the fixed account. We
will credit that part of the policy value that is equal to any outstanding loan
with interest at an effective annual yield of at least 6.0% (8.0% for preferred
loans).
We may delay transfers, surrenders, partial withdrawals, net death benefits and
Policy loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at least equal to an effective annual yield of 3.0%
per year for the deferment. Amounts from the fixed account used to make payments
on policies that we or our affiliates issue will not be delayed.
53
<PAGE>
TRANSFERS, SURRENDERS, AND PARTIAL WITHDRAWALS
If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge may be imposed. On a decrease in face
amount, the surrender charge deducted is a fraction of the charge that would
apply to a full surrender. We deduct partial withdrawals from policy value
allocated to the fixed account on a last-in/first-out basis. This means that the
last payments allocated to Fixed Account will be withdrawn first.
The first 12 transfers in a Policy year currently are free. After that, we will
deduct a $10 transfer charge for each transfer in that Policy year. The transfer
privilege is subject to our consent and to our then current rules.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, and the financial
statements of Allmerica Select Separate Account II of the Company as of
December 31, 1999 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 PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Variable Account are included
in this Prospectus, beginning immediately after the Appendices. The financial
statements of the Company should be considered only as bearing on our ability to
meet our obligations under the Policy. They should not be considered as bearing
on the investment performance of the assets held in the Variable Account.
54
<PAGE>
APPENDIX A
GUIDELINE MINIMUM SUM INSURED TABLE
The Guideline Minimum Sum Insured is a percentage of the policy value as set
forth below, according to federal tax regulations:
GUIDELINE MINIMUM SUM INSURED
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
- ---------------- -------------
<S> <C>
40 and under.......................................... 250%
41.................................................... 245%
42.................................................... 240%
43.................................................... 235%
44.................................................... 220%
45.................................................... 215%
46.................................................... 209%
47.................................................... 203%
48.................................................... 197%
49.................................................... 191%
50.................................................... 185%
51.................................................... 178%
52.................................................... 171%
53.................................................... 164%
54.................................................... 157%
55.................................................... 150%
56.................................................... 146%
57.................................................... 142%
58.................................................... 138%
59.................................................... 134%
60.................................................... 130%
61.................................................... 128%
62.................................................... 126%
63.................................................... 124%
64.................................................... 122%
65.................................................... 120%
70.................................................... 115%
71.................................................... 113%
72.................................................... 111%
73.................................................... 109%
74.................................................... 107%
75-90................................................. 105%
91.................................................... 104%
92.................................................... 103%
93.................................................... 102%
94.................................................... 101%
95 and above.......................................... 100%
</TABLE>
A-1
<PAGE>
APPENDIX B
OPTIONAL INSURANCE BENEFITS
This Appendix provides only a summary of other insurance benefits available by
Rider for an additional charge. For more information, contact your
representative.
WAIVER OF PREMIUM RIDER
This Rider provides that, during periods of total disability continuing more
than four months, we will add to the policy value each month an amount you
selected or the amount needed to pay the monthly insurance protection charges,
whichever is greater. This amount will keep the Policy in force. This benefit is
subject to our maximum issue benefits. Its cost will change yearly.
GUARANTEED INSURABILITY RIDER
This Rider guarantees that insurance may be added at various option dates
without Evidence of Insurability. This benefit may be exercised on the option
dates even if the Insured is disabled.
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 policy.
OPTION TO ACCELERATE BENEFITS ENDORSEMENT
This endorsement allows part of the Policy proceeds to be available before death
if the Insured becomes terminally ill or is permanently confined to a nursing
home.
EXCHANGE OPTION RIDER
This Rider allows you to use the Policy to insure a different person, subject to
our guidelines.
GUARANTEED DEATH BENEFIT RIDER
This Rider, which is available only at issue, (a) guarantees that your Policy
will not lapse regardless of the Performance of the Variable Account and (b)
provides a guaranteed net death benefit.
Certain Riders May Not Be Available In All States.
B-1
<PAGE>
APPENDIX C
PAYMENT OPTIONS
PAYMENT OPTIONS
On written request, the surrender value or all or part of any payable net death
benefit may be paid under one or more payment options then offered by the
Company. If you do not make an election, we will pay the benefits in a single
sum. If a payment option is selected, the beneficiary may pay to us any amount
that would otherwise be deducted from the death benefit. A certificate will be
provided to the payee describing the payment option selected.
The amounts payable under a payment option are paid from the general account.
These amounts are not based on the investment experience of the variable
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
the Policy Owner and beneficiary provisions, any option selection may be changed
before the net death benefit becomes payable. If you make no selection, the
beneficiary may select an option when the net death benefit becomes payable.
C-1
<PAGE>
APPENDIX D
ILLUSTRATIONS OF DEATH BENEFIT, POLICY VALUES
AND ACCUMULATED PAYMENTS
The following tables illustrate the way in which the Policy's death benefit and
Policy Value could vary over an extended period of time. ON REQUEST, WE WILL
PROVIDE A COMPARABLE ILLUSTRATION BASED ON THE PROPOSED INSURED'S AGE, SEX, AND
UNDERWRITING CLASS, AND THE REQUESTED FACE AMOUNT, DEATH BENEFIT OPTION AND
RIDERS.
ASSUMPTIONS
The tables illustrate a Policy issued to a male, Age 30, under a standard
Underwriting Class and qualifying for the non-smoker discount, and a Policy
issued to a male, Age 45, under a standard Underwriting Class and qualifying for
the non-smoker discount. In each case, one table illustrates the guaranteed cost
of insurance rates and the other table illustrates the current costs of
insurance rates as presently in effect.
The tables assume that no Policy loans have been made, that you have not
requested an increase or decrease in the initial Fact Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Policy year (so that no transaction or transfer charges have been incurred).
The tables assumed that all premiums are allocated to and remain in the
Allmerica Select II Separate Account for the entire period shown. The tables 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 rate of 0%, 6%, and 12%. The
second column of the tables show the amount which would accumulate if the
premiums were invested each year to earn interest (after taxes) at 5%,
compounded annually.
The Policy 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 Policy
years. The values also would be different depending on the allocation of the
Policy's total Policy Value among the Sub-Accounts of the Variable 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 in the tables take into account the deduction of the payment
expense charge, the monthly deduction from Policy Value, the daily charge
against the Variable Account for mortality and expense risks and for the
Variable Account administrative charge (for the first ten Policy years). In the
Current Cost of Insurance Charges tables, the Variable Account charges are
equivalent to an effective annual rate of 0.80% of the average daily value of
the assets in the Variable Account in the first ten Policy Years, and 0.65%
thereafter. In the Guaranteed Cost of Insurance Charges tables, the Variable
Account charges are equivalent to an effective annual rate of 0.95% of the
average daily value of the assets in the Variable Account in the first ten
Policy Years, and 0.80% thereafter.
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 0.95% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary, and in 1999, ranged from an
annual rate of 0.29% to an annual rate of 1.92% of average daily net assets. The
fees and expenses associated with your Policy may be more or less than 0.95% in
the aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
Until further notice, Allmerica Financial Investment Management Services, Inc.
("AFIMS") has declared a voluntary expense limitation of 1.50% of average net
assets for Select International Equity Fund, 1.35% for Select Aggressive Growth
Fund and Select Capital Appreciation Fund, 1.25% for Select Value Opportunity
D-1
<PAGE>
Fund, 1.20% for Select Growth Fund, 1.10% for Select Growth and Income Fund,
1.00% for Select Income Fund, and 0.60% for Money Market Fund. The total
operating expenses of these Funds of the Trust were less than their respective
expense limitations throughout 1999.
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-advisor. Until further notice, the Select Value Opportunity
Fund's 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 declaration of a voluntary management fee or
expense limitation in any year does not bind AFIMS to declare future expense
limitations with respect to these Funds. These limitations may be terminated at
any time.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
NET ANNUAL RATES OF INVESTMENT
Applying the mortality and expense risk charge, the administrative charge, and
the average Fund advisory fees and operating expenses of 0.95% of average net
assets, in the Current Cost of Insurance Charges tables the gross annual rates
of investment return of 0%, 6% and 12% would produce net annual rates of -1.75%,
4.25% and 10.25%, respectively, during the first 10 Policy years and -1.60%,
4.40% and 10.40%, respectively, after that. In the Guaranteed Cost of Insurance
Charges tables, the gross annual rates of investment return of 0%, 6% and 12%
would produce net annual rates of -1.90%, 4.10% and 10.10%, respectively, during
the first 10 Policy years and -1.75%, 4.25% and 10.25%, respectively, after
that.
The hypothetical returns shown in the tables do not reflect any charges for
income taxes against the Variable Account since no charges are currently made.
However, if in the future the charges are made, to produce illustrated death
benefits and cash values, the gross annual investment rates of return would have
to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges. The
second column of the tables shows the amount that would accumulate if the
Guideline Annual Premium were invested to earn interest (after taxes) at 5%,
compounded annually.
D-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT VARIABLE LIFE POLICY
AMOUNT = $100,000
MALE NON-SMOKER AGE 30
SUM INSURED OPTION 2
BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ----------------------------- ----------------------------- ----------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------- --------- --------- ------- --------- --------- ------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 667 1,744 101,744 777 1,854 101,854 888 1,965 101,965
2 4,305 2,380 3,457 103,457 2,710 3,788 103,788 3,054 4,131 104,131
3 6,620 4,198 5,140 105,140 4,860 5,803 105,803 5,577 6,520 106,520
4 9,051 5,986 6,794 106,794 7,096 7,904 107,904 8,345 9,153 109,153
5 11,604 7,734 8,407 108,407 9,408 10,082 110,082 11,370 12,043 112,043
6 14,284 9,441 9,980 109,980 11,801 12,340 112,340 14,679 15,217 115,217
7 17,098 11,121 11,525 111,525 14,290 14,694 114,694 18,313 18,717 118,717
8 20,053 12,763 13,032 113,032 16,867 17,136 117,136 22,293 22,562 122,562
9 23,156 14,365 14,500 114,500 19,535 19,670 119,670 26,655 26,789 126,789
10 26,414 15,931 15,931 115,931 22,298 22,298 122,298 31,437 31,437 131,437
11 29,834 17,345 17,345 117,345 25,057 25,057 125,057 36,592 36,592 136,592
12 33,426 18,720 18,720 118,720 27,920 27,920 127,920 42,265 42,265 142,265
13 37,197 20,056 20,056 120,056 30,890 30,890 130,890 48,510 48,510 148,510
14 41,157 21,351 21,351 121,351 33,971 33,971 133,971 55,383 55,383 155,383
15 45,315 22,604 22,604 122,604 37,166 37,166 137,166 62,949 62,949 162,949
16 49,681 23,820 23,820 123,820 40,485 40,485 140,485 71,284 71,284 171,284
17 54,265 24,991 24,991 124,991 43,922 43,922 143,922 80,458 80,458 180,458
18 59,078 26,125 26,125 126,125 47,492 47,492 147,492 90,567 90,567 190,567
19 64,132 27,221 27,221 127,221 51,199 51,199 151,199 101,706 101,706 201,706
20 69,439 28,278 28,278 128,278 55,046 55,046 155,046 113,978 113,978 217,698
Age 60 139,522 36,259 36,259 136,259 102,102 102,102 202,102 331,018 331,018 443,564
Age 65 189,673 38,090 38,090 138,090 132,367 132,367 232,367 549,309 549,309 670,157
Age 70 253,680 38,113 38,113 138,113 167,967 167,967 267,967 903,529 903,529 1,048,094
Age 75 335,370 35,266 35,266 135,266 208,864 208,864 308,864 1,480,061 1,480,061 1,583,665
</TABLE>
(1) Assumes a $2,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient policy 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 POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY 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 POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED 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.
D-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT VARIABLE LIFE POLICY
AMOUNT = $100,000
MALE NON-SMOKER AGE 30
SUM INSURED OPTION 2
BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------ ------------------------------ -----------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------- --------- ---------- ------- --------- ---------- ------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 664 1,741 101,741 774 1,852 101,852 885 1,962 101,962
2 4,305 2,372 3,449 103,449 2,702 3,779 103,779 3,045 4,122 104,122
3 6,620 4,182 5,124 105,124 4,843 5,785 105,785 5,558 6,501 106,501
4 9,051 5,960 6,768 106,768 7,066 7,874 107,874 8,312 9,120 109,120
5 11,604 7,695 8,369 108,369 9,363 10,036 110,036 11,317 11,990 111,990
6 14,284 9,388 9,927 109,927 11,736 12,275 112,275 14,600 15,138 115,138
7 17,098 11,052 11,455 111,455 14,201 14,605 114,605 18,200 18,604 118,604
8 20,053 12,674 12,943 112,943 16,749 17,019 117,019 22,138 22,407 122,407
9 23,156 14,256 14,391 114,391 19,384 19,519 119,519 26,447 26,582 126,582
10 26,414 15,799 15,799 115,799 22,109 22,109 122,109 31,166 31,166 131,166
11 29,834 17,183 17,183 117,183 24,817 24,817 124,817 36,237 36,237 136,237
12 33,426 18,531 18,531 118,531 27,628 27,628 127,628 41,815 41,815 141,815
13 37,197 19,832 19,832 119,832 30,534 30,534 130,534 47,939 47,939 147,939
14 41,157 21,098 21,098 121,098 33,551 33,551 133,551 54,678 54,678 154,678
15 45,315 22,318 22,318 122,318 36,672 36,672 136,672 62,083 62,083 162,083
16 49,681 23,493 23,493 123,493 39,900 39,900 139,900 70,222 70,222 170,222
17 54,265 24,623 24,623 124,623 43,242 43,242 143,242 79,169 79,169 179,169
18 59,078 25,698 25,698 125,698 46,688 46,688 146,688 88,996 88,996 188,996
19 64,132 26,731 26,731 126,731 50,257 50,257 150,257 99,805 99,805 199,805
20 69,439 27,710 27,710 127,710 53,940 53,940 153,940 111,683 111,683 213,314
Age 60 139,522 33,493 33,493 133,493 96,807 96,807 196,807 317,909 317,909 425,998
Age 65 189,673 32,226 32,226 132,226 121,420 121,420 221,420 520,322 520,322 634,793
Age 70 253,680 25,942 25,942 125,942 145,829 145,829 245,829 840,654 840,654 975,158
Age 75 335,370 11,579 11,579 111,579 165,998 165,998 265,998 1,349,832 1,349,832 1,449,832
</TABLE>
(1) Assumes a $2,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient policy 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 POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY 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 POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED 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.
D-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT VARIABLE LIFE POLICY
MALE NON-SMOKER AGE 45
FACE AMOUNT = $250,000
SUM INSURED OPTION 1
BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------ ------------------------------ -----------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------- --------- ---------- ------- --------- ---------- ------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,171 250,000 65 3,387 250,000 282 3,604 250,000
2 9,041 2,913 6,238 250,000 3,544 6,870 250,000 4,203 7,529 250,000
3 13,903 6,275 9,185 250,000 7,524 10,434 250,000 8,879 11,789 250,000
4 19,008 9,532 12,027 250,000 11,603 14,097 250,000 13,942 16,437 250,000
5 24,368 12,668 14,746 250,000 15,767 17,846 250,000 19,415 21,494 250,000
6 29,996 15,680 17,343 250,000 20,020 21,683 250,000 25,342 27,005 250,000
7 35,906 18,561 19,808 250,000 24,356 25,603 250,000 31,763 33,010 250,000
8 42,112 21,298 22,129 250,000 28,766 29,597 250,000 38,722 39,553 250,000
9 48,627 23,882 24,298 250,000 33,245 33,661 250,000 46,271 46,687 250,000
10 55,469 26,298 26,298 250,000 37,782 37,782 250,000 54,466 54,466 250,000
11 62,652 28,582 28,582 250,000 42,424 42,424 250,000 63,427 63,427 250,000
12 70,195 30,751 30,751 250,000 47,211 47,211 250,000 73,298 73,298 250,000
13 78,114 32,809 32,809 250,000 52,155 52,155 250,000 84,187 84,187 250,000
14 86,430 34,757 34,757 250,000 57,265 57,265 250,000 96,217 96,217 250,000
15 95,161 36,587 36,587 250,000 62,546 62,546 250,000 109,520 109,520 250,000
16 104,330 38,297 38,297 250,000 68,008 68,008 250,000 124,247 124,247 250,000
17 113,956 39,882 39,882 250,000 73,659 73,659 250,000 140,571 140,571 250,000
18 124,064 41,335 41,335 250,000 79,506 79,506 250,000 158,685 158,685 250,000
19 134,677 42,646 42,646 250,000 85,557 85,557 250,000 178,812 178,812 250,000
20 145,821 43,808 43,808 250,000 91,823 91,823 250,000 201,208 201,208 250,000
Age 60 95,161 36,587 36,587 250,000 62,546 62,546 250,000 109,520 109,520 250,000
Age 65 145,821 43,808 43,808 250,000 91,823 91,823 250,000 201,208 201,208 250,000
Age 70 210,477 47,405 47,405 250,000 127,125 127,125 250,000 353,475 353,475 410,031
Age 75 292,995 45,138 45,138 250,000 170,558 170,558 250,000 601,316 601,316 643,408
</TABLE>
(1) Assumes a $4,200 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient policy 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 POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY 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 POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED 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.
D-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ALLMERICA SELECT VARIABLE LIFE POLICY
MALE NON-SMOKER AGE 45
FACE AMOUNT = $250,000
SUM INSURED OPTION 1
BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------ ------------------------------ -----------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ ------------- --------- ---------- ------- --------- ---------- ------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,165 250,000 60 3,382 250,000 277 3,599 250,000
2 9,041 2,897 6,223 250,000 3,528 6,854 250,000 4,187 7,512 250,000
3 13,903 6,237 9,147 250,000 7,483 10,393 250,000 8,836 11,746 250,000
4 19,008 9,476 11,970 250,000 11,539 14,033 250,000 13,871 16,365 250,000
5 24,368 12,589 14,667 250,000 15,674 17,753 250,000 19,306 21,385 250,000
6 29,996 15,551 17,214 250,000 19,867 21,530 250,000 25,160 26,823 250,000
7 35,906 18,396 19,643 250,000 24,151 25,398 250,000 31,509 32,756 250,000
8 42,112 21,099 21,931 250,000 28,507 29,338 250,000 38,385 39,216 250,000
9 48,627 23,638 24,054 250,000 32,914 33,330 250,000 45,823 46,239 250,000
10 55,469 25,990 25,990 250,000 37,355 37,355 250,000 53,870 53,870 250,000
11 62,652 27,790 27,790 250,000 41,482 41,482 250,000 62,273 62,273 250,000
12 70,195 29,388 29,388 250,000 45,642 45,642 250,000 71,448 71,448 250,000
13 78,114 30,790 30,790 250,000 49,843 49,843 250,000 81,498 81,498 250,000
14 86,430 31,974 31,974 250,000 54,071 54,071 250,000 92,520 92,520 250,000
15 95,161 32,918 32,918 250,000 58,313 58,313 250,000 104,627 104,627 250,000
16 104,330 33,600 33,600 250,000 62,554 62,554 250,000 117,955 117,955 250,000
17 113,956 33,996 33,996 250,000 66,783 66,783 250,000 132,665 132,665 250,000
18 124,064 34,085 34,085 250,000 70,989 70,989 250,000 148,947 148,947 250,000
19 134,677 33,815 33,815 250,000 75,139 75,139 250,000 167,016 167,016 250,000
20 145,821 33,109 33,109 250,000 79,181 79,181 250,000 187,125 187,125 250,000
Age 60 95,161 32,918 32,918 250,000 58,313 58,313 250,000 104,627 104,627 250,000
Age 65 145,821 33,109 33,109 250,000 79,181 79,181 250,000 187,125 187,125 250,000
Age 70 210,477 21,602 21,602 250,000 97,202 97,202 250,000 324,231 324,231 376,108
Age 75 292,995 0 0 250,000 107,255 107,255 250,000 542,791 542,791 580,786
</TABLE>
(1) Assumes a $4,200 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient policy 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 POLICYOWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY 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 POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR POLICY VALUE
TRANSFERRED TO THE FIXED 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.
D-6
<PAGE>
APPENDIX E
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge is computed on the date of issue and on each
increase in face amount. The maximum surrender charge is a:
- Deferred administrative charge of $8.50 per $1,000 of initial face amount
(or face amount increase) AND
- Deferred sales charge of 28.5% of payments received up to the guideline
annual premium (GAP)
A further limitation is imposed based on the Standard Non-Forfeiture Law of each
state. The maximum surrender charges at the date of issue and on each increase
in face amount are shown in the table below. During the first two Policy years
following the date of issue or an increase in face amount, the surrender charge
may be less than the maximum. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The maximum surrender charge is level for the first 24 Policy months, reduces by
1/96th for the next 96 Policy months, reaching zero at the end of ten Policy
years.
The Factors used to compute the maximum surrender charges vary with the issue
age and underwriting class (Smoker) as indicated in the table below.
MAXIMUM SURRENDER CHARGE PER $1,000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female Unisex Unisex
increase Nonsmoker Smoker Nonsmoker Smoker Nonsmoker Smoker
- -------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
0 N/A 9.44 N/A 9.21 N/A 9.39
1 N/A 9.43 N/A 9.20 N/A 9.38
2 N/A 9.46 N/A 9.23 N/A 9.41
3 N/A 9.49 N/A 9.25 N/A 9.45
4 N/A 9.53 N/A 9.28 N/A 9.48
5 N/A 9.57 N/A 9.31 N/A 9.52
6 N/A 9.62 N/A 9.34 N/A 9.56
7 N/A 9.66 N/A 9.38 N/A 9.61
8 N/A 9.72 N/A 9.41 N/A 9.65
9 N/A 9.77 N/A 9.45 N/A 9.71
10 N/A 9.83 N/A 9.49 N/A 9.76
11 N/A 9.89 N/A 9.53 N/A 9.82
12 N/A 9.95 N/A 9.58 N/A 9.88
13 N/A 10.02 N/A 9.62 N/A 9.94
14 N/A 10.09 N/A 9.67 N/A 10.01
15 N/A 10.16 N/A 9.72 N/A 10.07
16 N/A 10.22 N/A 9.78 N/A 10.13
17 N/A 10.29 N/A 9.83 N/A 10.20
18 9.90 10.36 9.67 9.89 9.85 10.26
19 9.95 10.43 9.72 9.95 9.90 10.33
20 10.00 10.50 9.77 10.01 9.96 10.40
21 10.06 10.58 9.82 10.07 10.01 10.48
22 10.12 10.66 9.88 10.14 10.07 10.55
23 10.19 10.75 9.94 10.21 10.13 10.64
24 10.25 10.84 10.00 10.29 10.20 10.73
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female Unisex Unisex
increase Nonsmoker Smoker Nonsmoker Smoker Nonsmoker Smoker
- -------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
25 10.33 10.94 10.06 10.37 10.27 10.82
26 10.41 11.04 10.13 10.46 10.35 10.92
27 10.49 11.16 10.21 10.54 10.43 11.03
28 10.58 11.28 10.28 10.64 10.52 11.15
29 10.68 11.42 10.37 10.74 10.61 11.28
30 10.78 11.56 10.45 10.84 10.71 11.41
31 10.89 11.71 10.54 10.96 10.82 11.55
32 11.00 11.87 10.64 11.07 10.93 11.70
33 11.12 12.03 10.74 11.20 11.05 11.86
34 11.25 12.21 10.85 11.33 11.17 12.03
35 11.39 12.41 10.96 11.47 11.30 12.21
36 11.54 12.61 11.08 11.61 11.44 12.40
37 11.69 12.82 11.21 11.77 11.59 12.60
38 11.85 13.05 11.34 11.93 11.75 12.82
39 12.03 13.29 11.48 12.10 11.92 13.04
40 12.21 13.54 11.63 12.28 12.09 13.28
41 12.40 13.81 11.79 12.46 12.28 13.53
42 12.61 14.09 11.95 12.66 12.47 13.79
43 12.83 14.39 12.12 12.86 12.68 14.07
44 13.06 14.71 12.30 13.07 12.90 14.36
45 13.30 15.04 12.50 13.29 13.14 14.67
46 13.56 15.39 12.70 13.53 13.38 14.99
47 13.84 15.76 12.91 13.78 13.65 15.33
48 14.13 16.16 13.14 14.04 13.93 15.69
49 14.45 16.57 13.38 14.31 14.22 16.08
50 14.78 17.02 13.64 14.60 14.54 16.48
51 15.14 17.49 13.91 14.91 14.88 16.91
52 15.52 17.99 14.20 15.23 15.24 17.37
53 15.92 18.52 14.50 15.57 15.62 17.85
54 16.35 19.08 14.82 15.93 16.03 18.36
55 16.82 19.67 15.17 16.31 16.46 18.90
56 17.31 20.29 15.53 16.71 16.93 19.47
57 17.83 20.96 15.92 17.14 17.42 20.07
58 18.39 21.66 16.34 17.60 17.95 20.70
59 18.99 22.41 16.79 18.09 18.51 21.38
60 19.63 23.20 17.28 18.62 19.11 22.10
61 20.32 24.05 17.80 19.20 19.76 22.87
62 21.06 24.96 18.37 19.81 20.46 23.68
63 21.85 25.92 18.98 20.48 21.20 24.55
64 22.69 26.94 19.63 21.18 22.00 25.47
65 23.60 28.01 20.33 21.94 22.85 26.44
66 24.57 29.15 21.08 22.74 23.77 27.46
67 25.61 30.35 21.88 23.60 24.74 28.54
68 26.73 31.63 22.75 24.52 25.80 29.69
69 27.93 33.00 23.70 25.53 26.93 30.92
70 29.23 34.46 24.74 26.63 28.16 32.24
71 30.64 36.02 25.88 27.83 29.48 33.65
72 32.13 37.70 27.13 29.15 30.90 35.17
73 33.75 39.48 28.48 30.59 32.44 36.79
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
Age at
issue or Male Male Female Female Unisex Unisex
increase Nonsmoker Smoker Nonsmoker Smoker Nonsmoker Smoker
- -------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
74 35.49 41.35 29.96 32.13 34.09 38.50
75 37.33 43.32 31.56 33.79 35.85 40.30
76 39.30 45.37 33.29 35.57 37.73 42.18
77 41.40 47.52 35.16 37.48 39.74 44.16
78 43.65 49.76 37.21 39.54 41.91 46.26
79 46.08 52.15 39.45 41.79 44.25 48.51
80 48.73 54.71 41.92 44.25 46.82 50.93
</TABLE>
EXAMPLES
For the purposes of these examples, assume that a male, Age 35, non-smoker
purchases a $100,000 Policy. In this example the guideline annual premium
("GAP") equals $1,014.21. His maximum surrender charge is calculated as follows:
Maximum surrender charge per table (11.39 X 100) $1,139.00
During the first two Policy 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 29% of Premiums received, up to one GAP
--------------------
Sum of (1) and (2)
The maximum surrender charge is $1,139.00. All payments are associated with the
initial face amount unless the face amount is increased.
EXAMPLE 1:
Assume the Policy Owner surrenders the Policy in the 10th Policy month, having
paid total payments of $900. The surrender charge would be $1,106.50.
EXAMPLE 2:
Assume the Policy Owner surrenders the Policy in the 60th month. Also assume
that after the 24th Policy month, the maximum surrender charge decreases by 1/96
per month thereby reaching zero at the end of the 10th Policy year. In this
example, the maximum surrender charge would be $711.
E-3
<PAGE>
APPENDIX F
PERFORMANCE INFORMATION
The Policies were first offered to the public in 1994. However, we may advertise
"Total Return" and "Average Annual Total Return" performance information based
on the periods that the Sub-Accounts have been in existence (Tables IA and IB),
and based on the periods that the Underlying Funds have been in existence
(Tables IIA and IIB). The results for any period prior to the Policies being
offered will be calculated as if the Policies had been offered during that
period of time, with all charges assumed to be those applicable to the
Sub-Accounts and the Funds.
Total return and average annual total return are based on the hypothetical
profile of a representative Policy owner and historical earnings and are not
intended to indicate future performance. "Total Return" is the total income
generated net of certain expenses and charges. "Average annual total return" is
net of the same expenses and charges, but reflects the hypothetical return
compounded annually. This hypothetical return is equal to cumulative return had
performance been constant over the entire period. Average annual total returns
are not the same as yearly results and tend to smooth out variations in the
Funds' return.
In Tables IA and IIA, performance information under the Policies is net of fund
expenses, mortality and expense risk charges, administrative charges, monthly
insurance protection charges and surrender charges. We take a representative
Policy owner and assume that:
- The Insured is a male Age 36, standard (non-smoker) underwriting class
- The Policy owner had allocations in each of the sub-accounts for the fund
durations shown, and
- There was a full surrender at the end of the applicable period
We may compare performance information for a sub-account in reports and
promotional literature to:
- Standard & Poor's 500 Composite Stock Price Index ("S&P 500")
- Dow Jones Industrial Average ("DJIA")
- Shearson Lehman Aggregate Bond Index
- Other unmanaged indices of unmanaged securities widely regarded by
investors as representative of the securities markets
- Other groups of variable life separate accounts or other investment
products tracked by Lipper Inc.
- Other services, companies, publications, or persons such as
Morningstar, Inc., who rank the investment products on performance or
other criteria
- The Consumer Price Index
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for insurance and administrative charges, separate account
charges and fund management costs and expenses.
Performance information for any sub-account reflects only the performance of a
hypothetical investment in the sub-account during a period. It is not
representative of what may be achieved in the future. However, performance
information may be helpful in reviewing market conditions during a period and in
considering a fund's success in meeting its investment objectives.
F-1
<PAGE>
In advertising, sales literature, publications or other materials, we may give
information on various topics of interest to Policy owners and prospective
Policy owners. These topics may include:
- The relationship between sectors of the economy and the economy as a whole
and its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation and automatic account rebalancing)
- The advantages and disadvantages of investing in tax-deferred and taxable
investments
- Customer profiles and hypothetical payment and investment scenarios
- Financial management and tax and retirement planning
- Investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Policies and the
characteristics of and market for the financial instruments.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/heath
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 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.
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,
1999. "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.
F-2
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
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 Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
all premiums were allocated to each Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund -56.54% N/A -44.45%
Select International Equity Fund -86.70% N/A 5.95%
T. Rowe Price International Stock Portfolio -85.28% N/A 1.19%
Select Aggressive Growth Fund -80.55% N/A 11.44%
Select Capital Appreciation Fund -92.31% N/A 9.05%
Select Value Opportunity Fund -100.00% N/A -64.22%
Select Growth Fund -88.38% N/A 18.18%
Select Strategic Growth Fund -100.00% N/A -53.47%
Fidelity VIP Growth Portfolio -81.63% N/A 18.12%
Select Growth and Income Fund -98.44% N/A 9.05%
Fidelity VIP Equity-Income Portfolio -100.00% N/A 4.35%
Fidelity VIP High Income Portfolio -100.00% N/A -3.97%
Select Income Fund -100.00% N/A -7.95%
Money Market Fund -100.00% N/A -8.78%
</TABLE>
The inception dates for the Sub-Accounts are: 5/1/95 for Money Market, Select
Aggressive Growth, Select Growth, Select Growth and Income, Select Income,
Select International Equity, Select Capital Appreciation, Fidelity VIP
Equity-Income, Fidelity VIP Growth, and Fidelity VIP High Income; 8/23/95 for T.
Rowe Price International Stock; and 2/20/98 for Select Emerging Markets, Select
Value Opportunity and Select Strategic Growth.
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.
F-3
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY POLICY 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 and all Sub-Account charges. THE DATA DOES NOT REFLECT
MONTHLY CHARGES UNDER THE POLICY 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 Policy year and that ALL premiums were
allocated to EACH Sub-Account individually.
<TABLE>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund 64.40% N/A 14.30%
Select International Equity Fund 30.66% N/A 17.61%
T. Rowe Price International Stock Portfolio 32.25% N/A 14.64%
Select Aggressive Growth Fund 37.55% N/A 22.62%
Select Capital Appreciation Fund 24.36% N/A 20.43%
Select Value Opportunity Fund -5.46% N/A -3.31%
Select Growth Fund 28.77% N/A 28.87%
Select Strategic Growth Fund 15.13% N/A 6.04%
Fidelity VIP Growth Portfolio 36.34% N/A 28.81%
Select Growth and Income Fund 17.48% N/A 20.43%
Fidelity VIP Equity-Income Portfolio 5.48% N/A 16.16%
Fidelity VIP High Income Portfolio 7.29% N/A 8.76%
Select Income Fund -1.64% N/A 5.29%
Money Market Fund 4.34% N/A 4.58%
</TABLE>
The inception dates for the Sub-Accounts are: 5/1/95 for Money Market, Select
Aggressive Growth, Select Growth, Select Growth and Income, Select Income,
Select International Equity, Select Capital Appreciation, Fidelity VIP
Equity-Income, Fidelity VIP Growth, and Fidelity VIP High Income; 8/23/95 for T.
Rowe Price International Stock; and 2/20/98 for Select Emerging Markets, Select
Value Opportunity and Select Strategic Growth.
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.
F-4
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
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 Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insured
is male, Age 36, standard (nonsmoker) Premium Class, that the Face Amount of the
Policy is $250,000, that an annual premium payment of $3,000 (approximately one
Guideline Annual Premium) was made at the beginning of each Policy year, that
ALL premiums were allocated to EACH Sub-Account individually, and that there was
a full surrender of the Policy at the end of the applicable period.
<TABLE>
ONE-YEAR 10 YEARS
TOTAL 5 OR LIFE OF
UNDERLYING FUND RETURN YEARS FUND (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund -56.54% N/A -44.45%
Select International Equity Fund -86.70% 7.47% 5.87%
T. Rowe Price International Stock Portfolio -85.28% 3.62% 3.73%
Select Aggressive Growth Fund -80.55% 12.62% 14.21%
Select Capital Appreciation Fund -92.31% N/A 9.10%
Select Value Opportunity Fund -100.00% 1.97% 3.66%
Select Growth Fund -88.38% 18.71% 14.06%
Select Strategic Growth Fund -100.00% N/A -53.47%
Fidelity VIP Growth Portfolio -81.63% 19.42% 15.33%
Select Growth and Income Fund -98.44% 10.86% 9.20%
Fidelity VIP Equity-Income Portfolio -100.00% 7.53% 9.80%
Fidelity VIP High Income Portfolio -100.00% -0.95% 7.57%
Select Income Fund -100.00% -5.40% -1.87%
Money Market Fund -100.00% -7.06% 0.01%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Growth and Income,
and Select Income; 4/30/93 for Select Value Opportunity; 5/2/94 for Select
International Equity; 4/28/95 for Select Capital Appreciation; 10/9/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income; 3/31/94 for T. Rowe Price International Stock; and 2/20/98 for
Select Emerging Markets and Select Strategic Growth.
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.
F-5
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY 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 and all Sub-Account charges. THE DATA DOES NOT
REFLECT MONTHLY CHARGES UNDER THE POLICY 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 Policy year and that ALL premiums
were allocated to EACH Sub-Account individually.
<TABLE>
ONE-YEAR 10 YEARS
TOTAL 5 OR LIFE OF
UNDERLYING FUND RETURN YEARS FUND (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund 64.40% N/A 14.30%
Select International Equity Fund 30.66% 17.61% 14.56%
T. Rowe Price International Stock Portfolio 32.25% 14.11% 12.38%
Select Aggressive Growth Fund 37.55% 22.36% 19.74%
Select Capital Appreciation Fund 24.36% N/A 20.44%
Select Value Opportunity Fund -5.46% 12.62% 10.68%
Select Growth Fund 28.77% 28.05% 19.60%
Select Strategic Growth Fund 15.13% N/A 6.04%
Fidelity VIP Growth Portfolio 36.34% 28.71% 18.99%
Select Growth and Income Fund 17.48% 20.73% 14.99%
Fidelity VIP Equity-Income Portfolio 5.48% 17.67% 13.67%
Fidelity VIP High Income Portfolio 7.29% 10.00% 11.54%
Select Income Fund -1.64% 6.07% 4.68%
Money Market Fund 4.34% 4.62% 4.39%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Money Market;
8/21/92 for Select Aggressive Growth, Select Growth, Select Growth and Income,
and Select Income; 4/30/93 for Select Value Opportunity; 5/2/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation; 10/9/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income; 3/31/94 for the T. Rowe Price International Stock; and 2/20/98 for
Select Emerging Markets and Select Strategic Growth.
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.
F-6
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 0.5 $ 22.8
Universal life and investment product
policy fees.............................. 328.1 267.4 212.2
Net investment income...................... 150.2 151.3 164.2
Net realized investment (losses) gains..... (8.7) 20.0 2.9
Other income............................... 36.9 0.6 1.4
------ ------ ------
Total revenues......................... 507.0 439.8 403.5
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses......... 173.6 153.9 187.8
Policy acquisition expenses................ 49.8 64.6 2.8
Sales practice litigation.................. -- 21.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Other operating expenses................... 151.3 104.1 101.3
------ ------ ------
Total benefits, losses and expenses.... 374.7 343.6 345.8
------ ------ ------
Income before federal income taxes............. 132.3 96.2 57.7
------ ------ ------
FEDERAL INCOME TAX EXPENSE
Current.................................... 15.5 22.1 13.9
Deferred................................... 30.5 11.8 7.1
------ ------ ------
Total federal income tax expense....... 46.0 33.9 21.0
------ ------ ------
Net income..................................... $ 86.3 $ 62.3 $ 36.7
====== ====== ======
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,354.2 and $1,284.6)............................ $ 1,324.6 $ 1,330.4
Equity securities at fair value (cost of $25.2 and
$27.4)............................................ 32.6 31.8
Mortgage loans...................................... 223.7 230.0
Policy loans........................................ 166.8 151.5
Real estate and other long-term investments......... 25.1 23.6
--------- ---------
Total investments............................... 1,772.8 1,767.3
--------- ---------
Cash and cash equivalents............................. 132.9 217.9
Accrued investment income............................. 36.0 33.5
Deferred policy acquisition costs..................... 1,156.4 950.5
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums...................... 287.2 308.0
Other assets.......................................... 64.8 46.9
Separate account assets............................... 14,527.9 11,020.4
--------- ---------
Total assets.................................... $17,978.0 $14,344.5
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,274.7 $ 2,284.8
Outstanding claims and losses....................... 13.7 17.9
Unearned premiums................................... 2.6 2.7
Contractholder deposit funds and other policy
liabilities....................................... 44.3 38.1
--------- ---------
Total policy liabilities and accruals........... 2,335.3 2,343.5
--------- ---------
Expenses and taxes payable............................ 216.8 146.2
Reinsurance premiums payable.......................... 17.9 45.7
Deferred federal income taxes......................... 94.8 78.8
Separate account liabilities.......................... 14,527.9 11,020.4
--------- ---------
Total liabilities............................... 17,192.7 13,634.6
--------- ---------
Contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,526 and 2,524 shares, issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 423.7 407.9
Accumulated other comprehensive (loss) income......... (2.6) 24.1
Retained earnings..................................... 361.7 275.4
--------- ---------
Total shareholder's equity...................... 785.3 709.9
--------- ---------
Total liabilities and shareholder's equity...... $17,978.0 $14,344.5
========= =========
</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) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 407.9 386.9 346.3
Issuance of common stock................... 15.8 21.0 40.6
------ ------ ------
Balance at end of period................... 423.7 407.9 386.9
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 24.1 38.5 20.5
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (41.1) (23.4) 27.0
Benefit (provision) for deferred
federal income taxes................. 14.4 9.0 (9.0)
------ ------ ------
(26.7) (14.4) 18.0
------ ------ ------
Balance at end of period................... (2.6) 24.1 38.5
------ ------ ------
RETAINED EARNINGS
Balance at beginning of period............. 275.4 213.1 176.4
Net income................................. 86.3 62.3 36.7
------ ------ ------
Balance at end of period................... 361.7 275.4 213.1
------ ------ ------
Total shareholder's equity............. $785.3 $709.9 $641.0
====== ====== ======
</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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $ 86.3 $ 62.3 $36.7
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (41.1) (23.4) 27.0
Benefit (provision) for deferred federal
income taxes.......................... 14.4 9.0 (9.0)
------ ------ -----
Other comprehensive (loss) income... (26.7) (14.4) 18.0
------ ------ -----
Comprehensive income.................... $ 59.6 $ 47.9 $54.7
====== ====== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<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) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 86.3 $ 62.3 $ 36.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized losses/(gains)......... 8.7 (20.0) (2.9)
Net amortization and depreciation... (2.3) (7.1) --
Sales practice litigation expense... -- 21.0 --
Loss from cession of disability
income business................... -- -- 53.9
Deferred federal income taxes....... 30.5 11.8 7.1
Payment related to cession of
disability income business........ -- -- (207.0)
Change in deferred acquisition
costs............................. (169.7) (177.8) (181.3)
Change in reinsurance premiums
payable........................... (31.5) 40.8 3.9
Change in accrued investment
income............................ (2.5) 0.7 3.5
Change in policy liabilities and
accruals, net..................... (8.4) 193.1 (72.4)
Change in reinsurance receivable.... 20.7 (56.9) 22.1
Change in expenses and taxes
payable........................... 64.1 55.4 0.2
Other, net.......................... (14.8) (28.5) (7.1)
------- ------- -------
Net cash (used in) provided by
operating activities.......... (18.9) 94.8 (343.3)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 330.9 187.0 909.7
Proceeds from disposals of equity
securities............................ 30.9 53.3 2.4
Proceeds from disposals of other
investments........................... 0.8 22.7 23.7
Proceeds from mortgages matured or
collected............................. 30.5 60.1 62.9
Purchase of available-for-sale fixed
maturities............................ (415.5) (136.0) (579.7)
Purchase of equity securities........... (20.2) (30.6) (3.2)
Purchase of other investments........... (44.1) (22.7) (9.0)
Purchase of mortgages................... -- (58.9) (70.4)
Other investing activities, net......... 2.0 (3.9) --
------- ------- -------
Net cash (used in) provided by
investing activities.............. (84.7) 71.0 336.4
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from subsidiaries.......... 14.6 -- --
Proceeds from issuance of stock and
capital paid in....................... 4.0 21.0 19.2
------- ------- -------
Net cash provided by financing
activities........................ 18.6 21.0 19.2
------- ------- -------
Net change in cash and cash equivalents..... (85.0) 186.8 12.3
Cash and cash equivalents, beginning of
period..................................... 217.9 31.1 18.8
------- ------- -------
Cash and cash equivalents, end of period.... $ 132.9 $ 217.9 $ 31.1
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ -- $ --
Income taxes paid....................... $ 4.4 $ 36.2 $ 5.4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED 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 First Allmerica Financial Life Insurance Company ("FAFLIC") which
is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC"). As
noted below, the consolidated accounts of AFLIAC include the accounts of certain
wholly-owned non-insurance subsidiaries (principally brokerage and investment
advisory subsidiaries).
Prior to July 1, 1999, AFLIAC was a wholly-owned subsidiary of SMA Financial
Corporation ("SMAFCO"), which was a wholly-owned subsidiary of FAFLIC. Effective
July 1, 1999 and in connection with AFC's restructuring activities, SMAFCO was
renamed Allmerica Asset Management , Inc. ("AAM") and contributed it's ownership
of AFLIAC to FAFLIC. AAM also contributed Allmerica Investments, Inc., Allmerica
Investment Management Company, Inc., Allmerica Financial Investment Management
Services, Inc., and Allmerica Financial Services Insurance Agency, Inc., to
AFLIAC in exchange for one share of AFLIAC common stock. The equity of these
four companies on July 1, 1999 was $11.8 million. For the six months ended
December 31, 1999, the subsidiaries of AFLIAC had total revenue of $35.5 million
and total benefits, losses and expenses of $24.4 million. All significant
intercompany accounts and transactions have been eliminated.
In addition, effective November 1, 1999, the Company's consolidated financial
statements include five wholly-owned insurance agencies. These agencies are
Allmerica Investments Insurance Agency Inc. of Alabama, Allmerica Investments
Insurance Agency of Florida Inc., Allmerica Investment Insurance Agency Inc. of
Georgia, Allmerica Investment Insurance Agency Inc. of Kentucky, and Allmerica
Investments Insurance Agency Inc. of Mississippi.
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary effective
November 30, 1998. Its results of operations are included for eleven months of
1998 and for the month of December, 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 preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. 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 re-evaluates such designation as of each balance sheet date.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there was one property remaining in the Company's real
estate portfolio, which is being actively marketed. This asset is carried at the
estimated fair value less costs of disposal. Depreciation is not recorded on
this asset while it is held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
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
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of 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.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income 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
3.0% to 6.0% for life insurance and 3 1/2% 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, variable
universal life and variable annuities include deposits received from customers
and investment earnings on their fund balances, less administrative charges.
Universal life fund balances are also assessed mortality and surrender charges.
Liabilities for variable annuities include a reserve for benefit claims in
excess of a guaranteed minimum fund value.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity 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 and losses are estimates of payments to be
made for reported claims and estimates of claims incurred but not reported for
individual life and disability income policies. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
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.
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life insurance and individual and group annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual disability income insurance premiums are
recognized as revenue over the related contract periods. The unexpired portion
of these premiums is recorded as unearned premiums. 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 include annuity benefit claims in excess of a guaranteed
minimum fund value, and 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, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from policy reserves,
policy acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. OTHER INCOME AND OTHER OPERATING EXPENSES
Other income and other operating expenses for the year ended December 31, 1999
include investment management and brokerage income and sub-advisory expenses
arising from the activities of the non-insurance subsidiaries that were
transferred to AFLIAC during 1999, as more fully described in Note 1A.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (an indirect wholly-owned
subsidiary of Allmerica Financial Corporation) years beginning after June 15,
2000. The Company is currently assessing the impact of adoption of Statement No.
133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $9.8 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance 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 adoption of this statement had no effect on the results
of operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. AFLIAC consists
of one segment, Allmerica Financial Services, which underwrites and distributes
variable annuities and variable universal life insurance via retail channels.
In June 1997, the FASB also issued Statement 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
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 130 for the first quarter of 1998, which resulted
primarily in reporting unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
During 1999, AFLIAC's parent contributed $11.8 million of additional paid-in
capital to the Company in the form of four subsidiaries as disclosed in Note 1A
above. These subsidiaries consisted of assets of $22.0 million, of which $14.6
million was cash and cash equivalents, and liabilities of $10.2 million. During
1999, 1998 and 1997, SMAFCO contributed $4.0 million, $21.0 million, and $40.6
million respectively, of additional paid-in capital to the Company. The nature
of the 1997 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 a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
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....... $ 5.2 $ 0.2 $-- $ 5.4
States and political subdivisions....... 12.4 0.1 -- 12.5
Foreign governments..................... 38.6 0.9 0.6 38.9
Corporate fixed maturities.............. 1,180.0 10.3 38.9 1,151.4
Mortgage-backed securities.............. 118.0 1.1 2.7 116.4
-------- ----- ----- --------
Total fixed maturities.................. $1,354.2 $12.6 $42.2 $1,324.6
======== ===== ===== ========
Equity securities....................... $ 25.2 $ 7.4 $-- $ 32.6
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities.................. $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1999, the amortized
cost and market value of these assets on deposit in New York were
$196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.1 million and
$4.2 million were on deposit with various state and governmental authorities at
December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 54.5 $ 54.8
Due after one year through five years....................... 349.1 347.2
Due after five years through ten years...................... 652.9 637.1
Due after ten years......................................... 297.7 285.5
-------- --------
Total....................................................... $1,354.2 $1,324.6
======== ========
</TABLE>
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 16.2 $ 7.9 $ 24.1
------ ------ ------
Net depreciation on available-for-sale securities........... (75.3) (0.2) (75.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 34.4 -- 34.4
Benefit from deferred federal income taxes.................. 14.3 0.1 14.4
------ ------ ------
(26.6) (0.1) (26.7)
------ ------ ------
Net (depreciation) appreciation, end of year................ $(10.4) $ 7.8 $ (2.6)
====== ====== ======
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
====== ====== ======
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 (depreciation) appreciation on other investments of $(3.1)
million, $0.9 million, and $1.3 million in 1999, 1998, and 1997,
respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans are diversified by property type and location. The real
estate investment was obtained by an affiliate 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 the real estate investment net of
applicable reserves were $234.6 million and $244.5 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $2.4 million and
$3.3 million at December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there was one property remaining in the Company's
real estate portfolio which is being actively marketed. Depreciation is not
recorded on this asset while it is held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $136.1 $129.2
Residential............................................... 18.5 18.9
Retail.................................................... 28.3 37.4
Industrial/warehouse...................................... 51.1 59.2
Other..................................................... 3.0 3.1
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
Geographic region:
South Atlantic............................................ $ 60.7 $ 55.5
Pacific................................................... 76.2 80.0
East North Central........................................ 35.9 41.4
Middle Atlantic........................................... 20.1 22.5
New England............................................... 29.9 26.9
West South Central........................................ 1.9 6.7
Other..................................................... 12.3 14.8
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows:
2000 -- $40.8 million; 2001 -- $6.3 million; 2002 -- $11.2 million; 2003 --
$0.5 million; 2004 -- $23.7 million; and $141.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1999, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $ 3.3 $(0.8) $0.1 $2.4
===== ===== ==== ====
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $3.3
===== ===== ==== ====
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
===== ===== ==== ====
</TABLE>
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $5.4 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $11.4 million and $15.3 million, with
related reserves of $0.7 million and $1.5 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $14.3 million, $17.0 million
and $19.8 million, with related interest income while such loans were impaired
of $1.5 million, $2.0 million and $2.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. OTHER
At December 31, 1999 and 1998, AFLIAC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.2 $107.7 $130.0
Mortgage loans.............................................. 19.0 25.5 20.4
Equity securities........................................... 0.4 0.3 1.3
Policy loans................................................ 12.4 11.7 10.8
Real estate and other long-term investments................. 4.0 4.8 4.9
Short-term investments...................................... 9.5 4.2 1.4
------ ------ ------
Gross investment income................................. 152.5 154.2 168.8
Less investment expenses.................................... (2.3) (2.9) (4.6)
------ ------ ------
Net investment income................................... $150.2 $151.3 $164.2
====== ====== ======
</TABLE>
F-15
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company had fixed maturities with a carrying value of
$0.8 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. There were no mortgage loans or fixed maturities on
non-accrual status at December 31, 1998. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, was a reduction in net income of $1.2 million in 1999,
and had no impact in 1998 and 1997.
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 $12.2 million, $12.6 million and $21.1 million at December 31,
1999, 1998 and 1997, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $0.9 million, $1.4 million and $1.9 million in 1999,
1998, and 1997, respectively. Actual interest income on these loans included in
net investment income aggregated $1.1 million, $1.8 million and $2.1 million in
1999, 1998 and 1997, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the year ended December 31, 1999.
Included in other long-term investments is income from limited partnerships of
$0.9 million and $0.7 million in 1999 and 1998, respectively. There was no
income from limited partnerships included in other long-term investments in
1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- -----
<S> <C> <C> <C>
Fixed maturities............................................ $(18.8) $(6.1) $ 3.0
Mortgage loans.............................................. 0.8 8.0 (1.1)
Equity securities........................................... 8.5 15.7 0.5
Real estate and other....................................... 0.8 2.4 0.5
------ ----- -----
Net realized investment (losses) gains...................... $ (8.7) $20.0 $ 2.9
====== ===== =====
</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>
1999
Fixed maturities............................................ $162.3 $ 2.7 $4.3
Equity securities........................................... $ 30.4 $10.1 $1.6
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $2.0
Equity securities........................................... $ 52.6 $17.5 $0.9
1997
Fixed maturities............................................ $702.9 $11.4 $5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
</TABLE>
F-16
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the consolidated statements of comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (net
of taxes of $(18.0) million, $(5.6) million and
$10.2 million in 1999, 1998 and 1997, respectively)........ $(33.4) $ (8.2) $20.3
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes of $(3.6) million,
$3.4 million and $1.2 million in 1999, 1998 and 1997,
respectively).............................................. (6.7) 6.2 2.3
------ ------ -----
Other comprehensive (loss) income........................... $(26.7) $(14.4) $18.0
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality.
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.
F-17
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
FIXED ANNUITY AND OTHER CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under individual fixed annuity
contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 132.9 $ 132.9 $ 217.9 $ 217.9
Fixed maturities.......................................... 1,324.6 1,324.6 1,330.4 1,330.4
Equity securities......................................... 32.6 32.6 31.8 31.8
Mortgage loans............................................ 223.7 222.8 230.0 241.9
Policy loans.............................................. 166.8 166.8 151.5 151.5
-------- -------- -------- --------
$1,880.6 $1,879.7 $1,961.6 $1,973.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $1,048.0 $1,014.9 $1,069.4 $1,034.6
Supplemental contracts without life contingencies......... 25.0 25.0 21.0 21.0
Other individual contract deposit funds................... 19.3 19.3 17.0 17.0
-------- -------- -------- --------
$1,092.3 $1,059.2 $1,107.4 $1,072.6
======== ======== ======== ========
</TABLE>
F-18
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense in
the consolidated statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $15.5 $22.1 $13.9
Deferred.................................................. 30.5 11.8 7.1
----- ----- -----
Total....................................................... $46.0 $33.9 $21.0
===== ===== =====
</TABLE>
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 income tax (asset) liability represents the tax effects of
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------- -------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(233.7) $(205.1)
Deferred acquisition costs................................ 339.7 278.8
Investments, net.......................................... (4.0) 12.5
Litigation reserves....................................... (4.3) (7.4)
Bad debt reserve.......................................... -- (0.4)
Other, net................................................ (2.9) 0.4
------- -------
Deferred tax liability, net................................. $ 94.8 $ 78.8
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $360.4 million and $291.7 million
at December 31, 1999 and 1998, respectively. Gross deferred income tax assets
totaled $265.6 million and $212.9 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The Company has appealed certain adjustments proposed by the IRS with respect
federal income tax returns for 1992, 1993, and 1994 for the FAFLIC/AFLIAC
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In the Company's opinion, adequate tax liabilities have
F-19
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
7. 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 $173.9 million, $145.4 million and $124.1 million in
1999, 1998 and 1997 respectively. The net amounts payable to FAFLIC and
affiliates for accrued expenses and various other liabilities and receivables
were $48.6 million and $16.4 million at December 31, 1999 and 1998,
respectively.
8. 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 aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
No dividends were declared by the Company during 1999, 1998 or 1997. During
2000, AFLIAC could pay dividends of $34.3 million to FAFLIC without prior
approval.
9. 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 Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement
No. 113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
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
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Amounts recoverable from reinsurers at December 31, 1999 and 1998 for the
disability income business were $241.5 million and $230.8 million, respectively,
traditional life were $9.7 million and $11.4 million, respectively, and
universal and variable universal life were $36.0 million and $65.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 41.3 $ 45.5 $ 48.8
Assumed................................................... -- -- 2.6
Ceded..................................................... (40.8) (45.0) (28.6)
------ ------ ------
Net premiums................................................ $ 0.5 $ 0.5 $ 22.8
====== ====== ======
Insurance and other individual policy benefits, claims and
losses:
Direct.................................................... $210.6 $204.0 $226.0
Assumed................................................... -- -- 4.2
Ceded..................................................... (37.0) (50.1) (42.4)
------ ------ ------
Net policy benefits, claims and losses...................... $173.6 $153.9 $187.8
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition cost
asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 950.5 $765.3 $632.7
Acquisition expenses deferred............................. 219.5 242.4 184.2
Amortized to expense during the year...................... (49.8) (64.6) (53.1)
Adjustment to equity during the year...................... 36.2 7.4 (10.2)
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...................................... $1,156.4 $950.5 $765.3
======== ====== ======
</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.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims and losses as new information becomes available
and further events occur which may impact the resolution of
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unsettled claims. Changes in prior estimates are recorded in results of
operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims and losses
related to the Company's disability income business was $240.7 million and
$233.3 million at December 31, 1999 and 1998. Due to the reinsurance agreement
whereby the Company has ceded substantially all of its disability income
business to a highly rated reinsurer, the Company 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 used in determining the
liability are revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement. The court granted preliminary approval of the settlement
on December 4, 1998. On May 19, 1999, the Court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. AFLIAC recognized a $21.0 million pre-tax expense during the third
quarter of 1998 related to this litigation. Although the Company believes that
this expense reflects appropriate recognition of its obligation under the
settlement, this estimate assumes the availability of insurance coverage for
certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's consolidated financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
13. 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
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. In 1999, 49 out of 50 states have adopted the
National Association of Insurance Commissioners proposed Codification, which
provides for uniform statutory accounting principles. These principles are
effective January 1, 2001. The Company is currently assessing the impact that
the adoption of Codification will have on its statutory results of operations
and financial position. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ 5.0 $ (8.2) $ 31.5
Statutory shareholder's surplus............................. $342.7 $312.2 $309.7
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Policyowners of the Allmerica Select Separate Account II 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
constituting the Allmerica Select Separate Account II of Allmerica Financial
Life Insurance and Annuity Company at December 31, 1999, the results of each of
their operations and the changes in each of their net assets for each of the
periods indicated, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of
Allmerica Financial Life Insurance and Annuity Company; 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 auditing
standards generally accepted in the United States, 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 securities at
December 31, 1999 by correspondence with the Funds, provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT SELECT
AGGRESSIVE SELECT GROWTH SELECT VALUE SELECT INTERNATIONAL
MONEY MARKET GROWTH GROWTH AND INCOME OPPORTUNITY INCOME EQUITY
------------- ----------- ----------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment
Trust..................... $4,612,221 $13,653,957 $17,899,879 $12,226,153 $1,408,654 $3,205,266 $11,189,955
Investments in shares of
Fidelity Variable
Insurance Products Funds
(VIP)..................... -- -- -- -- -- -- --
Investment in shares of T.
Rowe Price International
Series, Inc............... -- -- -- -- -- -- --
---------- ----------- ----------- ----------- ---------- ---------- -----------
Total assets.............. 4,612,221 13,653,957 17,899,879 12,226,153 1,408,654 3,205,266 11,189,955
LIABILITIES:
Payable to Allmerica
Financial Life Insurance
and Annuity Company....... 269,360 -- -- -- -- -- --
---------- ----------- ----------- ----------- ---------- ---------- -----------
Net assets................ $4,342,861 $13,653,957 $17,899,879 $12,226,153 $1,408,654 $3,205,266 $11,189,955
========== =========== =========== =========== ========== ========== ===========
Net asset distribution by
category:
Variable life policies.... $4,342,861 $13,653,957 $17,899,879 $12,226,153 $1,408,654 $3,205,266 $11,189,955
========== =========== =========== =========== ========== ========== ===========
Units outstanding, December
31, 1999.................. 3,522,827 5,270,915 5,477,561 5,132,635 1,499,618 2,519,768 5,247,462
Net asset value per unit,
December 31, 1999......... $ 1.232777 $ 2.590434 $ 3.267856 $ 2.382042 $ 0.939342 $ 1.272048 $ 2.132451
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT SELECT FIDELITY FIDELITY FIDELITY T. ROWE PRICE
CAPITAL EMERGING STRATEGIC VIP VIP VIP INTERNATIONAL
APPRECIATION MARKETS GROWTH HIGH INCOME EQUITY-INCOME GROWTH STOCK
------------ ---------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment
Trust..................... $8,183,193 $ 930,034 $ 951,704 $ -- $ -- $ -- $ --
Investments in shares of
Fidelity Variable
Insurance Products Funds
(VIP)..................... -- -- -- 4,740,237 8,606,958 13,303,140 --
Investment in shares of T.
Rowe Price International
Series, Inc............... -- -- -- -- -- -- 5,478,821
---------- ---------- ---------- ---------- ---------- ----------- ----------
Total assets.............. 8,183,193 930,034 951,704 4,740,237 8,606,958 13,303,140 5,478,821
LIABILITIES:
Payable to Allmerica
Financial Life Insurance
and Annuity Company....... -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------- ----------
Net assets................ $8,183,193 $ 930,034 $ 951,704 $4,740,237 $8,606,958 $13,303,140 $5,478,821
========== ========== ========== ========== ========== =========== ==========
Net asset distribution by
category:
Variable life policies.... $8,183,193 $ 930,034 $ 951,704 $4,740,237 $8,606,958 $13,303,140 $5,478,821
========== ========== ========== ========== ========== =========== ==========
Units outstanding, December
31, 1999.................. 3,435,362 725,276 853,385 3,202,846 4,276,654 4,079,933 3,021,071
Net asset value per unit,
December 31, 1999......... $ 2.382047 $ 1.282318 $ 1.115210 $ 1.480008 $ 2.012545 $ 3.260627 $ 1.813536
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MONEY MARKET SELECT AGGRESSIVE GROWTH
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $227,080 $175,154 $146,135 $ -- $ -- $ --
-------- -------- -------- ---------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 29,170 21,235 17,744 64,369 41,399 18,928
Administrative expense fees...... 6,842 4,981 4,163 15,099 9,711 4,440
-------- -------- -------- ---------- -------- --------
Total expenses................. 36,012 26,216 21,907 79,468 51,110 23,368
-------- -------- -------- ---------- -------- --------
Net investment income (loss)... 191,068 148,938 124,228 (79,468) (51,110) (23,368)
-------- -------- -------- ---------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- -- -- -- 342,572
Net realized gain (loss) from
sales of investments........... -- -- -- 98,038 2,186 (801)
-------- -------- -------- ---------- -------- --------
Net realized gain (loss)....... -- -- -- 98,038 2,186 341,771
Net unrealized gain (loss)....... -- -- -- 3,545,212 622,935 72,690
-------- -------- -------- ---------- -------- --------
Net realized and unrealized
gain (loss).................. -- -- -- 3,643,250 625,121 414,461
-------- -------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from operations....... $191,068 $148,938 $124,228 $3,563,782 $574,011 $391,093
======== ======== ======== ========== ======== ========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 6,938 $ 6,418 $ 11,566 $ 116,721 $ 83,350 $ 38,447
---------- ---------- -------- ---------- -------- --------
EXPENSES:
Mortality and expense risk
fees........................... 87,021 43,744 15,735 67,540 40,612 17,679
Administrative expense fees...... 20,412 10,261 3,691 15,842 9,526 4,146
---------- ---------- -------- ---------- -------- --------
Total expenses................. 107,433 54,005 19,426 83,382 50,138 21,825
---------- ---------- -------- ---------- -------- --------
Net investment income (loss)... (100,495) (47,587) (7,860) 33,339 33,212 16,622
---------- ---------- -------- ---------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 440,879 67,370 199,778 779,339 22,002 351,176
Net realized gain (loss) from
sales of investments........... 193,555 27,507 19,841 89,046 14,307 18,494
---------- ---------- -------- ---------- -------- --------
Net realized gain (loss)....... 634,434 94,877 219,619 868,385 36,309 369,670
Net unrealized gain (loss)....... 3,272,528 2,033,516 405,886 794,354 850,067 87,946
---------- ---------- -------- ---------- -------- --------
Net realized and unrealized
gain (loss).................. 3,906,962 2,128,393 625,505 1,662,739 886,376 457,616
---------- ---------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from operations....... $3,806,467 $2,080,806 $617,645 $1,696,078 $919,588 $474,238
========== ========== ======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INCOME
SELECT VALUE OPPORTUNITY FOR THE
FOR THE FOR THE YEAR ENDED
YEAR ENDED PERIOD DECEMBER 31,
DECEMBER 31, 2/20/98* TO -------------------------------
1999 12/31/98 1999 1998 1997
------------ ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................................... $ 6 $ 6,865 $ 212,376 $129,283 $71,740
--------- ------- --------- -------- -------
EXPENSES:
Mortality and expense risk fees..................... 7,226 1,859 21,735 13,699 7,062
Administrative expense fees......................... 1,695 436 5,098 3,213 1,657
--------- ------- --------- -------- -------
Total expenses.................................... 8,921 2,295 26,833 16,912 8,719
--------- ------- --------- -------- -------
Net investment income (loss)...................... (8,915) 4,570 185,543 112,371 63,021
--------- ------- --------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors.......................................... 63,281 841 26,470 -- --
Net realized gain (loss) from sales of
investments....................................... 3,266 (2,512) (33,295) 3,373 2,433
--------- ------- --------- -------- -------
Net realized gain (loss).......................... 66,547 (1,671) (6,825) 3,373 2,433
Net unrealized gain (loss).......................... (100,511) 21,746 (236,038) 645 28,919
--------- ------- --------- -------- -------
Net realized and unrealized gain (loss)........... (33,964) 20,075 (242,863) 4,018 31,352
--------- ------- --------- -------- -------
Net increase (decrease) in net assets from
operations...................................... $ (42,879) $24,645 $ (57,320) $116,389 $94,373
========= ======= ========= ======== =======
<CAPTION>
SELECT INTERNATIONAL EQUITY SELECT CAPITAL APPRECIATION
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- -------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................................... $ -- $ 85,662 $ 79,369 $ -- $ -- $ --
---------- -------- --------- ---------- -------- --------
EXPENSES:
Mortality and expense risk fees..................... 54,103 35,312 15,789 41,197 24,475 10,894
Administrative expense fees......................... 12,691 8,283 3,704 9,664 5,740 2,556
---------- -------- --------- ---------- -------- --------
Total expenses.................................... 66,794 43,595 19,493 50,861 30,215 13,450
---------- -------- --------- ---------- -------- --------
Net investment income (loss)...................... (66,794) 42,067 59,876 (50,861) (30,215) (13,450)
---------- -------- --------- ---------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors.......................................... -- -- 111,310 9,651 823,033 --
Net realized gain (loss) from sales of
investments....................................... 403,617 114,424 16,112 41,082 10,040 3,491
---------- -------- --------- ---------- -------- --------
Net realized gain (loss).......................... 403,617 114,424 127,422 50,733 833,073 3,491
Net unrealized gain (loss).......................... 2,127,716 583,139 (153,589) 1,547,971 (182,338) 302,721
---------- -------- --------- ---------- -------- --------
Net realized and unrealized gain (loss)........... 2,531,333 697,563 (26,167) 1,598,704 650,735 306,212
---------- -------- --------- ---------- -------- --------
Net increase (decrease) in net assets from
operations...................................... $2,464,539 $739,630 $ 33,709 $1,547,843 $620,520 $292,762
========== ======== ========= ========== ======== ========
<CAPTION>
SELECT EMERGING MARKETS
FOR THE FOR THE
YEAR ENDED PERIOD
DECEMBER 31, 2/20/98* TO
1999 12/31/98
------------ -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividends........................................... $ 3,706 $ 523
-------- ------
EXPENSES:
Mortality and expense risk fees..................... 3,545 589
Administrative expense fees......................... 832 139
-------- ------
Total expenses.................................... 4,377 728
-------- ------
Net investment income (loss)...................... (671) (205)
-------- ------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors.......................................... -- --
Net realized gain (loss) from sales of
investments....................................... 17,885 (657)
-------- ------
Net realized gain (loss).......................... 17,885 (657)
Net unrealized gain (loss).......................... 277,944 3,262
-------- ------
Net realized and unrealized gain (loss)........... 295,829 2,605
-------- ------
Net increase (decrease) in net assets from
operations...................................... $295,158 $2,400
======== ======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME
SELECT STRATEGIC GROWTH FOR THE
FOR THE FOR THE YEAR ENDED
YEAR ENDED PERIOD DECEMBER 31,
DECEMBER 31, 2/20/98* TO --------------------------------
1999 12/31/98 1999 1998 1997
------------ ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ 2,639 $ 1,034 $ 372,689 $ 158,854 $ 33,619
-------- ------- --------- --------- --------
EXPENSES:
Mortality and expense risk fees............... 4,613 1,108 28,845 18,746 7,324
Administrative expense fees................... 1,083 260 6,767 4,398 1,718
-------- ------- --------- --------- --------
Total expenses.............................. 5,696 1,368 35,612 23,144 9,042
-------- ------- --------- --------- --------
Net investment income (loss)................ (3,057) (334) 337,077 135,710 24,577
-------- ------- --------- --------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... -- -- 13,932 100,938 4,155
Net realized gain (loss) from sales of
investments................................. 3,387 (8,655) (104,455) (40,086) 3,387
-------- ------- --------- --------- --------
Net realized gain (loss).................... 3,387 (8,655) (90,523) 60,852 7,542
Net unrealized gain (loss).................... 108,948 17,807 41,910 (377,055) 140,962
-------- ------- --------- --------- --------
Net realized and unrealized gain (loss)..... 112,335 9,152 (48,613) (316,203) 148,504
-------- ------- --------- --------- --------
Net increase (decrease) in net assets from
operations................................ $109,278 $ 8,818 $ 288,464 $(180,493) $173,081
======== ======= ========= ========= ========
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $102,500 $ 50,230 $ 17,528 $ 12,390 $ 15,966 $ 8,295
-------- -------- -------- ---------- ---------- --------
EXPENSES:
Mortality and expense risk fees............... 52,629 31,695 12,698 60,866 28,780 12,398
Administrative expense fees................... 12,345 7,435 2,979 14,278 6,750 2,908
-------- -------- -------- ---------- ---------- --------
Total expenses.............................. 64,974 39,130 15,677 75,144 35,530 15,306
-------- -------- -------- ---------- ---------- --------
Net investment income (loss)................ 37,526 11,100 1,851 (62,754) (19,564) (7,011)
-------- -------- -------- ---------- ---------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... 226,579 178,760 88,129 779,015 417,641 37,128
Net realized gain (loss) from sales of
investments................................. 72,945 8,042 15,787 169,742 20,497 11,558
-------- -------- -------- ---------- ---------- --------
Net realized gain (loss).................... 299,524 186,802 103,916 948,757 438,138 48,686
Net unrealized gain (loss).................... 47,631 313,911 303,518 2,302,712 1,114,442 306,079
-------- -------- -------- ---------- ---------- --------
Net realized and unrealized gain (loss)..... 347,155 500,713 407,434 3,251,469 1,552,580 354,765
-------- -------- -------- ---------- ---------- --------
Net increase (decrease) in net assets from
operations................................ $384,681 $511,813 $409,285 $3,188,715 $1,533,016 $347,754
======== ======== ======== ========== ========== ========
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
---------- -------- ---------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends..................................... $ 19,580 $ 42,006 $ 21,184
---------- -------- ---------
EXPENSES:
Mortality and expense risk fees............... 26,434 18,891 10,189
Administrative expense fees................... 6,201 4,431 2,390
---------- -------- ---------
Total expenses.............................. 32,635 23,322 12,579
---------- -------- ---------
Net investment income (loss)................ (13,055) 18,684 8,605
---------- -------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors.................................... 61,539 14,826 30,010
Net realized gain (loss) from sales of
investments................................. 220,213 106,914 101,222
---------- -------- ---------
Net realized gain (loss).................... 281,752 121,740 131,232
Net unrealized gain (loss).................... 1,036,965 264,312 (130,878)
---------- -------- ---------
Net realized and unrealized gain (loss)..... 1,318,717 386,052 354
---------- -------- ---------
Net increase (decrease) in net assets from
operations................................ $1,305,662 $404,736 $ 8,959
========== ======== =========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET
YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 191,068 $ 148,938 $ 124,228
Net realized gain
(loss)................ -- -- --
Net unrealized gain
(loss)................ -- -- --
----------- ----------- ------------
Net Increase (decrease)
in net assets from
operations............ 191,068 148,938 124,228
----------- ----------- ------------
FROM POLICY TRANSACTIONS:
Net premiums............ 8,499,350 11,093,896 10,400,201
Terminations............ (437,319) (24,162) (13,610)
Insurance and other
charges............... (432,293) (345,540) (254,488)
Transfers between
sub-accounts
(including fixed
account), net......... (7,249,751) (9,375,482) (10,000,972)
Other transfers from
(to) the General
Account............... (351,420) 44,518 61,006
Net Increase (decrease)
in investment by
Sponsor............... -- -- --
----------- ----------- ------------
Net Increase (decrease)
in net assets from
policy
transactions.......... 28,567 1,393,230 192,137
----------- ----------- ------------
Net Increase (decrease)
in net assets......... 219,635 1,542,168 316,365
NET ASSETS:
Beginning of year......... 4,123,226 2,581,058 2,264,693
----------- ----------- ------------
End of year............... $ 4,342,861 $ 4,123,226 $ 2,581,058
=========== =========== ============
<CAPTION>
SELECT AGGRESSIVE GROWTH
YEAR ENDED
DECEMBER 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (79,468) $ (51,110) $ (23,368)
Net realized gain
(loss)................ 98,038 2,186 341,771
Net unrealized gain
(loss)................ 3,545,212 622,935 72,690
----------- ---------- ----------
Net Increase (decrease)
in net assets from
operations............ 3,563,782 574,011 391,093
----------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............ 2,125,768 2,831,723 1,443,916
Terminations............ (121,893) (85,085) (21,979)
Insurance and other
charges............... (578,716) (431,113) (197,905)
Transfers between
sub-accounts
(including fixed
account), net......... 373,435 1,046,205 1,568,913
Other transfers from
(to) the General
Account............... (148,963) (95,337) (37,702)
Net Increase (decrease)
in investment by
Sponsor............... -- -- --
----------- ---------- ----------
Net Increase (decrease)
in net assets from
policy
transactions.......... 1,649,631 3,266,393 2,755,243
----------- ---------- ----------
Net Increase (decrease)
in net assets......... 5,213,413 3,840,404 3,146,336
NET ASSETS:
Beginning of year......... 8,440,544 4,600,140 1,453,804
----------- ---------- ----------
End of year............... $13,653,957 $8,440,544 $4,600,140
=========== ========== ==========
<CAPTION>
SELECT GROWTH
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (100,495) $ (47,587) $ (7,860)
Net realized gain
(loss)................ 634,434 94,877 219,619
Net unrealized gain
(loss)................ 3,272,528 2,033,516 405,886
----------- ----------- ----------
Net Increase (decrease)
in net assets from
operations............ 3,806,467 2,080,806 617,645
----------- ----------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............ 2,584,751 3,309,479 1,340,830
Terminations............ (113,850) (52,990) (14,477)
Insurance and other
charges............... (773,212) (481,408) (185,902)
Transfers between
sub-accounts
(including fixed
account), net......... 2,157,977 1,598,818 1,166,196
Other transfers from
(to) the General
Account............... (171,538) (51,913) (34,742)
Net Increase (decrease)
in investment by
Sponsor............... -- -- --
----------- ----------- ----------
Net Increase (decrease)
in net assets from
policy
transactions.......... 3,684,128 4,321,986 2,271,905
----------- ----------- ----------
Net Increase (decrease)
in net assets......... 7,490,595 6,402,792 2,889,550
NET ASSETS:
Beginning of year......... 10,409,284 4,006,492 1,116,942
----------- ----------- ----------
End of year............... $17,899,879 $10,409,284 $4,006,492
=========== =========== ==========
<CAPTION>
SELECT GROWTH AND INCOME
YEAR ENDED
DECEMBER 31,
-----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ 33,339 $ 33,212 $ 16,622
Net realized gain
(loss)................ 868,385 36,309 369,670
Net unrealized gain
(loss)................ 794,354 850,067 87,946
----------- ---------- ----------
Net Increase (decrease)
in net assets from
operations............ 1,696,078 919,588 474,238
----------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............ 1,816,620 2,634,152 1,270,182
Terminations............ (109,642) (42,745) (17,389)
Insurance and other
charges............... (642,172) (445,514) (206,456)
Transfers between
sub-accounts
(including fixed
account), net......... 729,016 1,552,003 1,585,084
Other transfers from
(to) the General
Account............... (105,558) (34,947) (65,145)
Net Increase (decrease)
in investment by
Sponsor............... -- -- --
----------- ---------- ----------
Net Increase (decrease)
in net assets from
policy
transactions.......... 1,688,264 3,662,949 2,566,276
----------- ---------- ----------
Net Increase (decrease)
in net assets......... 3,384,342 4,582,537 3,040,514
NET ASSETS:
Beginning of year......... 8,841,811 4,259,274 1,218,760
----------- ---------- ----------
End of year............... $12,226,153 $8,841,811 $4,259,274
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT INCOME
SELECT VALUE OPPORTUNITY YEAR ENDED
YEAR ENDED PERIOD DECEMBER 31,
DECEMBER 31, FROM 2/20/98* ------------------------------------
1999 TO 12/31/98 1999 1998 1997
-------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ (8,915) $ 4,570 $ 185,543 $ 112,371 $ 63,021
Net realized gain (loss)................... 66,547 (1,671) (6,825) 3,373 2,433
Net unrealized gain (loss)................. (100,511) 21,746 (236,038) 645 28,919
---------- -------- ---------- ---------- ----------
Net Increase (decrease) in net assets from
operations............................... (42,879) 24,645 (57,320) 116,389 94,373
---------- -------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 518,429 442,998 904,312 989,252 605,452
Terminations............................... (6,936) -- (18,153) (30,715) (12,415)
Insurance and other charges................ (92,535) (24,021) (251,970) (186,443) (100,701)
Transfers between sub-accounts (including
fixed account), net...................... 221,042 386,166 (394,040) 620,540 315,978
Other transfers from (to) the General
Account.................................. (13,504) (4,754) (11,695) (19,491) (1,599)
Net Increase (decrease) in investment by
Sponsor.................................. -- 3 -- -- --
---------- -------- ---------- ---------- ----------
Net Increase (decrease) in net assets from
policy transactions...................... 626,496 800,392 228,454 1,373,143 806,715
---------- -------- ---------- ---------- ----------
Net Increase (decrease) in net assets...... 583,617 825,037 171,134 1,489,532 901,088
NET ASSETS:
Beginning of year............................ 825,037 -- 3,034,132 1,544,600 643,512
---------- -------- ---------- ---------- ----------
End of year.................................. $1,408,654 $825,037 $3,205,266 $3,034,132 $1,544,600
========== ======== ========== ========== ==========
<CAPTION>
SELECT INTERNATIONAL EQUITY SELECT CAPITAL APPRECIATION
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ (66,794) $ 42,067 $ 59,876 $ (50,861) $ (30,215) $ (13,450)
Net realized gain (loss)................... 403,617 114,424 127,422 50,733 833,073 3,491
Net unrealized gain (loss)................. 2,127,716 583,139 (153,589) 1,547,971 (182,338) 302,721
----------- ---------- ---------- ----------- ---------- ----------
Net Increase (decrease) in net assets from
operations............................... 2,464,539 739,630 33,709 1,547,843 620,520 292,762
----------- ---------- ---------- ----------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 1,611,539 2,532,926 1,354,454 1,816,681 1,822,847 1,254,757
Terminations............................... (95,538) (23,226) (34,908) (104,605) (22,986) (13,698)
Insurance and other charges................ (471,025) (358,394) (182,904) (471,791) (364,119) (203,548)
Transfers between sub-accounts (including
fixed account), net...................... 554,738 762,716 1,261,530 118,892 632,404 646,073
Other transfers from (to) the General
Account.................................. (83,308) (73,744) (71,126) (139,336) (71,984) (3,432)
Net Increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
----------- ---------- ---------- ----------- ---------- ----------
Net Increase (decrease) in net assets from
policy transactions...................... 1,516,406 2,840,278 2,327,046 1,219,841 1,996,162 1,680,152
----------- ---------- ---------- ----------- ---------- ----------
Net Increase (decrease) in net assets...... 3,980,945 3,579,908 2,360,755 2,767,684 2,616,682 1,972,914
NET ASSETS:
Beginning of year............................ 7,209,010 3,629,102 1,268,347 5,415,509 2,798,827 825,913
----------- ---------- ---------- ----------- ---------- ----------
End of year.................................. $11,189,955 $7,209,010 $3,629,102 $ 8,183,193 $5,415,509 $2,798,827
=========== ========== ========== =========== ========== ==========
<CAPTION>
SELECT EMERGING MARKETS
YEAR ENDED PERIOD
DECEMBER 31, FROM 2/20/98*
1999 TO 12/31/98
-------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ (671) $ (205)
Net realized gain (loss)................... 17,885 (657)
Net unrealized gain (loss)................. 277,944 3,262
-------- --------
Net Increase (decrease) in net assets from
operations............................... 295,158 2,400
-------- --------
FROM POLICY TRANSACTIONS:
Net premiums............................... 226,199 188,464
Terminations............................... (10,830) --
Insurance and other charges................ (34,424) (5,902)
Transfers between sub-accounts (including
fixed account), net...................... 169,423 110,693
Other transfers from (to) the General
Account.................................. (9,686) (1,468)
Net Increase (decrease) in investment by
Sponsor.................................. -- 7
-------- --------
Net Increase (decrease) in net assets from
policy transactions...................... 340,682 291,794
-------- --------
Net Increase (decrease) in net assets...... 635,840 294,194
NET ASSETS:
Beginning of year............................ 294,194 --
-------- --------
End of year.................................. $930,034 $294,194
======== ========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP HIGH INCOME
SELECT STRATEGIC GROWTH YEAR ENDED
YEAR ENDED PERIOD DECEMBER 31,
DECEMBER 31, FROM 2/20/98* ------------------------------------
1999 TO 12/31/98 1999 1998 1997
-------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ (3,057) $ (334) $ 337,077 $ 135,710 $ 24,577
Net realized gain (loss)................... 3,387 (8,655) (90,523) 60,852 7,542
Net unrealized gain (loss)................. 108,948 17,807 41,910 (377,055) 140,962
-------- -------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 109,278 8,818 288,464 (180,493) 173,081
-------- -------- ---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 308,044 232,074 1,024,579 1,491,023 653,604
Terminations............................... (3,128) -- (51,617) (15,611) (25,742)
Insurance and other charges................ (48,752) (9,764) (395,698) (275,034) (95,813)
Transfers between sub-accounts (including
fixed account), net...................... 155,088 208,376 200,467 803,446 872,815
Other transfers from (to) the General
Account.................................. (7,995) (339) (26,938) (64,644) (2,650)
Net Increase (decrease) in investment by
Sponsor.................................. -- 4 -- -- --
-------- -------- ---------- ---------- ----------
Net Increase (decrease) in net assets from
policy transactions...................... 403,257 430,351 750,793 1,939,180 1,402,214
-------- -------- ---------- ---------- ----------
Net Increase (decrease) in net assets...... 512,535 439,169 1,039,257 1,758,687 1,575,295
NET ASSETS:
Beginning of year............................ 439,169 -- 3,700,980 1,942,293 366,998
-------- -------- ---------- ---------- ----------
End of year.................................. $951,704 $439,169 $4,740,237 $3,700,980 $1,942,293
======== ======== ========== ========== ==========
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------ -------------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ 37,526 $ 11,100 $ 1,851 $ (62,754) $ (19,564) $ (7,011)
Net realized gain (loss)................... 299,524 186,802 103,916 948,757 438,138 48,686
Net unrealized gain (loss)................. 47,631 313,911 303,518 2,302,712 1,114,442 306,079
---------- ---------- ---------- ----------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 384,681 511,813 409,285 3,188,715 1,533,016 347,754
---------- ---------- ---------- ----------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 1,655,610 2,314,509 1,217,983 2,074,948 1,948,708 1,050,189
Terminations............................... (135,062) (45,399) (24,981) (139,619) (33,897) (30,496)
Insurance and other charges................ (489,731) (348,152) (154,199) (630,306) (374,918) (192,569)
Transfers between sub-accounts (including
fixed account), net...................... 447,187 1,112,290 1,005,523 2,347,894 661,183 744,603
Other transfers from (to) the General
Account.................................. (77,096) (25,298) (62,094) (75,484) (47,548) (15,076)
Net Increase (decrease) in investment by
Sponsor.................................. -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------
Net Increase (decrease) in net assets from
policy transactions...................... 1,400,908 3,007,950 1,982,232 3,577,433 2,153,528 1,556,651
---------- ---------- ---------- ----------- ---------- ----------
Net Increase (decrease) in net assets...... 1,785,589 3,519,763 2,391,517 6,766,148 3,686,544 1,904,405
NET ASSETS:
Beginning of year............................ 6,821,369 3,301,606 910,089 6,536,992 2,850,448 946,043
---------- ---------- ---------- ----------- ---------- ----------
End of year.................................. $8,606,958 $6,821,369 $3,301,606 $13,303,140 $6,536,992 $2,850,448
========== ========== ========== =========== ========== ==========
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............... $ (13,055) $ 18,684 $ 8,605
Net realized gain (loss)................... 281,752 121,740 131,232
Net unrealized gain (loss)................. 1,036,965 264,312 (130,878)
---------- ---------- ----------
Net increase (decrease) in net assets from
operations............................... 1,305,662 404,736 8,959
---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums............................... 888,716 1,141,623 822,104
Terminations............................... (62,729) (17,679) (11,448)
Insurance and other charges................ (245,746) (196,518) (112,458)
Transfers between sub-accounts (including
fixed account), net...................... 29,617 3,307 885,865
Other transfers from (to) the General
Account.................................. (50,373) (36,350) 7,626
Net Increase (decrease) in investment by
Sponsor.................................. -- -- --
---------- ---------- ----------
Net Increase (decrease) in net assets from
policy transactions...................... 559,485 894,383 1,591,689
---------- ---------- ----------
Net Increase (decrease) in net assets...... 1,865,147 1,299,119 1,600,648
NET ASSETS:
Beginning of year............................ 3,613,674 2,314,555 713,907
---------- ---------- ----------
End of year.................................. $5,478,821 $3,613,674 $2,314,555
========== ========== ==========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Allmerica Select Separate Account II (Allmerica Select II) 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 insurance 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 Allmerica Select II are clearly identified
and distinguished from the other assets and liabilities of the Company.
Allmerica Select II cannot be charged with liabilities arising out of any other
business of the Company.
Allmerica Select II is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Allmerica Select II
currently offers fourteen Sub-Accounts. Each Sub-Account invests exclusively in
a corresponding investment portfolio of the Allmerica Investment Trust (the
Trust) managed by Allmerica Financial Investment Management Services, Inc.
(AFIMS) a wholly-owned subsidiary of the Company; or of the Variable Insurance
Products Fund (Fidelity VIP), 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. The Trust, Fidelity VIP and T.
Rowe Price (the Funds) are open-end, diversified management investment companies
registered under the 1940 Act.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the 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 Allmerica Select
II. Therefore, no provision for income taxes has been charged against Allmerica
Select II.
SA-9
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------- --------- ----------- ---------
<S> <C> <C> <C>
Money Market......................................... 4,612,221 $ 4,612,221 $ 1.000
Select Aggressive Growth............................. 4,002,919 9,385,703 3.411
Select Growth........................................ 5,870,738 12,276,019 3.049
Select Growth and Income............................. 6,324,963 10,470,020 1.933
Select Value Opportunity............................. 926,137 1,487,419 1.521
Select Income........................................ 3,363,343 3,416,249 0.953
Select International Equity.......................... 5,509,579 8,515,620 2.031
Select Capital Appreciation.......................... 3,985,968 6,515,028 2.053
Select Emerging Markets.............................. 719,841 648,828 1.292
Select Strategic Growth.............................. 845,208 824,949 1.126
Fidelity VIP High Income............................. 419,119 4,918,930 11.310
Fidelity VIP Equity-Income........................... 334,771 7,877,662 25.710
Fidelity VIP Growth.................................. 242,184 9,540,791 54.930
T. Rowe Price International Stock.................... 287,753 4,277,691 19.040
</TABLE>
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 and the cost of any additional benefits
provided by rider. 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.
The Company makes a charge of 0.65% 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 0.80% per annum.
During the first 10 policy years, the Company also charges each Sub-Account
0.15% per annum based on the average daily net assets of each Sub-Account for
administrative expenses. These charges are deducted in the daily computation of
unit values and are paid to the Company on a daily basis.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Allmerica Select II. Broker-dealers sell the policies through their registered
representatives who are appointed by Allmerica Investments. Commissions are paid
to such registered representatives by the Company. The current series of
policies have a contingent surrender charge comprised of a deferred
administrative charge and a deferred sales charge.
SA-10
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Allmerica Select II satisfies the current
requirements of the regulations, and it intends that Allmerica Select II will
continue to meet such requirements.
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by
Allmerica Select II during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- -------------------- ----------- -----------
<S> <C> <C>
Money Market................................................ $13,808,908 $13,377,815
Select Aggressive Growth.................................... 2,285,713 715,551
Select Growth............................................... 4,831,723 807,211
Select Growth and Income.................................... 3,209,191 708,249
Select Value Opportunity.................................... 870,026 189,164
Select Income............................................... 1,983,639 1,543,172
Select International Equity................................. 4,629,947 3,180,335
Select Capital Appreciation................................. 1,893,621 714,990
Select Emerging Markets..................................... 447,849 107,838
Select Strategic Growth..................................... 456,807 56,607
Fidelity VIP High Income.................................... 3,203,485 2,101,683
Fidelity VIP Equity-Income.................................. 2,403,160 738,147
Fidelity VIP Growth......................................... 5,148,406 854,712
T. Rowe Price International Stock........................... 3,816,563 3,208,594
----------- -----------
Totals...................................................... $48,989,038 $28,304,068
=========== ===========
</TABLE>
NOTE 7 -- PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-11
