ALLMERICA SELECT SEP ACCT II OF 1ST ALLMERICA FIN LIF INS CO, 497, 1998-12-18

ALLMERICA SELECT SEP ACCT II OF 1ST ALLMERICA FIN LIF INS CO
497, 1998-12-18

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ALLMERICA SELECT LIFE
(INDIVIDUAL AND GROUP FLEXIBLE PAYMENT VARIABLE LIFE INSURANCE POLICIES)

First Allmerica Financial Life Insurance Company ("Company" or "First
Allmerica") issues the Allmerica Select Life individual and group flexible
payment variable life insurance policies ("Policies") described in this
prospectus. The Policies are funded through Allmerica Select Separate Account II
("Variable Account"), a separate investment account of the Company. 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 Policies permit allocations to the following Funds of Allmerica Investment
Trust ("Trust"), Variable Insurance Products Fund ("VIP") and T. Rowe Price
International Series, Inc. ("T. Rowe Price")

(Certain Funds may not be available in all states):

<TABLE>
<S> <C> <C>
FUND MANAGER
Select Emerging Markets Fund Schroder Capital Management International Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International Stock Portfolio Rowe Price-Fleming International, Inc.
Select Aggressive Growth Fund Nicholas-Applegate Capital Management, L.P.
Select Capital Appreciation Fund T. Rowe Price Associates, Inc.
Select Value Opportunity Fund Cramer Rosenthal McGlynn, LLC
Select Growth Fund Putnam Investment Management, Inc.
Select Strategic Growth Fund Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income Portfolio Fidelity Management & Research Company
Fidelity VIP High Income Portfolio Fidelity Management & Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>

IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH THE POLICY. THIS
PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF ALLMERICA
INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND AND T. ROWE PRICE
INTERNATIONAL SERIES, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY INVEST IN
HIGHER YIELDING, HIGHER RISK, LOWER RATED DEBT SECURITIES (SEE "INVESTMENT
OBJECTIVES AND POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF
THIS PROSPECTUS FOR FUTURE REFERENCE.

THE SECURITIES AND EXCHANGE HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

THE POLICIES ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT DEPOSITS
OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT UNION. THE
POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE POLICIES ARE
SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS
OF PRINCIPAL.

CORRESPONDENCE MAY BE MAILED TO
ALLMERICA SELECT, P.O. BOX 8179,
BOSTON, MA 02266-8179

DATED DECEMBER 15, 1998
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
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TABLE OF CONTENTS

<TABLE>
<S> <C>
SPECIAL TERMS........................................................................ 4
SUMMARY.............................................................................. 7
PERFORMANCE INFORMATION.............................................................. 16
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE UNDERLYING FUNDS........... 20
INVESTMENT OBJECTIVES AND POLICIES................................................... 21
INVESTMENT ADVISORY SERVICES......................................................... 23
THE POLICY........................................................................... 25
Applying for a Policy.............................................................. 25
Free-Look Period................................................................... 26
Replacement Policies............................................................... 27
Conversion Privilege............................................................... 27
Payments........................................................................... 27
Allocation of Net Payments......................................................... 28
Transfer Privilege................................................................. 28
Death Benefit...................................................................... 29
Guaranteed Death Benefit Rider..................................................... 30
Level Option and Adjustable Option................................................. 31
Change to Level Option or Adjustable Option........................................ 32
Change in Face Amount.............................................................. 33
Policy Value....................................................................... 34
Payment Options.................................................................... 35
Optional Insurance Benefits........................................................ 35
Surrender.......................................................................... 36
Partial Withdrawal................................................................. 36
Paid-Up Insurance Option........................................................... 36
CHARGES AND DEDUCTIONS............................................................... 37
Payment Expense Charge............................................................. 37
Monthly Insurance Protection Charges............................................... 38
Charges Against or Reflected in the Assets of the Variable Account................. 40
Surrender Charge................................................................... 40
Partial Withdrawal Costs........................................................... 41
Transfer Charges................................................................... 42
Charge for Change in Face Amount................................................... 42
Other Administrative Charges....................................................... 42
POLICY LOANS......................................................................... 43
Preferred Loan Option.............................................................. 43
Loan Interest Charged.............................................................. 43
Repayment of Outstanding Loan...................................................... 44
Effect of Policy Loans............................................................. 44
Policies Issued in Connection with TSA Plans....................................... 44
POLICY TERMINATION AND REINSTATEMENT................................................. 45
Termination........................................................................ 45
Reinstatement...................................................................... 45
OTHER POLICY PROVISIONS.............................................................. 46
Policy Owner....................................................................... 46
Beneficiary........................................................................ 46
Assignment......................................................................... 47
Limit on Right to Challenge Policy................................................. 47
Suicide............................................................................ 47
Misstatement of Age or Sex......................................................... 47
Delay of Payments.................................................................. 47
</TABLE>

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<TABLE>
<S> <C>
FEDERAL TAX CONSIDERATIONS........................................................... 48
The Company and the Variable Account............................................... 48
Taxation of the Policies........................................................... 48
Policy Loans....................................................................... 48
Policies Issued in Connection with TSA Plans....................................... 49
Modified Endowment Policies........................................................ 50
VOTING RIGHTS........................................................................ 50
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY...................................... 52
DISTRIBUTION......................................................................... 53
SERVICES............................................................................. 53
REPORTS.............................................................................. 54
LEGAL PROCEEDINGS.................................................................... 54
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.................................... 54
FURTHER INFORMATION.................................................................. 55
MORE INFORMATION ABOUT THE FIXED ACCOUNT............................................. 55
General Description................................................................ 55
Fixed Account Interest............................................................. 55
Transfers, Surrenders, Partial Withdrawals and Policy Loans........................ 55
INDEPENDENT ACCOUNTANTS.............................................................. 56
YEAR 2000 DISCLOSURE................................................................. 56
FINANCIAL STATEMENTS................................................................. 57
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 -- COMPUTING MAXIMUM SURRENDER CHARGES.................................... E-1
UNAUDITED FINANCIAL STATEMENTS....................................................... UF-1
FINANCIAL STATEMENTS................................................................. F-1
</TABLE>

3
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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: First Allmerica Financial Life Insurance Company. "We," "our" and "us"
and "the Company" refer to First Allmerica Financial 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 is the Policy
Value less any Outstanding Loan, unless the Guaranteed Death Benefit Rider is in
effect. If the Guaranteed Death Benefit Rider is in effect, 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.

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: 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 Variable Insurance Products Fund: 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.

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

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

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.

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.

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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.

6
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SUMMARY

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.

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

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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)

- 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 as required in your state, 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, a right to cancel the increase also applies.

In New York, if you purchase the Policy as a replacement for an existing life
insurance or annuity contract, you may return the Policy within 60 days of
receiving it. You will receive a refund equal to the Surrender Value of the
policy plus all fees and charges.

8
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WHAT ARE MY INVESTMENT CHOICES?

You have a choice of fourteen Funds:

Select Emerging Markets Fund
Managed by Schroder Capital Management International Inc.

Select International Equity Fund
Managed by Bank of Ireland Asset Management (U.S.) Limited

T. Rowe Price International Stock Portfolio
Managed by Rowe Price-Fleming International, Inc.

Select Aggressive Growth Fund
Managed by Nicholas-Applegate Capital Management, L.P.

Select Capital Appreciation Fund
Managed by T. Rowe Price Associates, Inc.

Select Value Opportunity Fund
Managed by Cramer Rosenthal McGlynn, LLC

Select Growth Fund
Managed by Putnam Investment Management, Inc.

Select Strategic Growth Fund
Managed by Cambiar Investors, Inc.

Fidelity VIP Growth Portfolio
Managed by Fidelity Management & Research Company

Select Growth and Income Fund
Managed by John A. Levin & Co., Inc.

Fidelity VIP Equity-Income Portfolio
Managed by Fidelity Management & Research Company

Fidelity VIP High Income Portfolio
Managed by Fidelity Management & Research Company

Select Income Fund
Managed by Standish, Ayer & Wood, Inc.

Money Market Fund
Managed by Allmerica Asset Management, Inc.

This range of investment choices allows you to allocate your money among the
Funds 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 for:

- 14 days from issuance and acceptance, except as described below

- 24 days from issuance and acceptance for replacements in states with a
20-day right to examine

After this, we will allocate all amounts as you have chosen.

The Policy also offers a Fixed Account. The Fixed Account is a guaranteed
account offering a minimum interest rate. It is part of the General Account of
the Company.

9
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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 VIP.
FMR is one of America's largest investment management organizations and has its
principal business address at 82 Devonshire Street, Boston MA. It is composed of
a number of different companies, which provide a variety of financial services
and products. FMR is the original Fidelity company, founded in 1946. It provides
a number of mutual Funds and other clients with investment research and
portfolio management services.

Rowe Price-Fleming International, Inc. ("Price-Fleming") is the investment
adviser of T. Rowe Price. Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $30 billion under management in its offices in Baltimore, London,
Tokyo, Hong Kong, Singapore and Buenos Aires.

The following are the investment advisers of the Funds:

<TABLE>
<CAPTION>
FUND INVESTMENT ADVISER
- -------------------------------- ------------------------------------------------
<S> <C>
Select Emerging Markets Fund Schroder Capital Management International Inc.
Select International Equity Fund Bank of Ireland Asset Management (U.S.) Limited
T. Rowe Price International
Stock 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 Cambiar Investors, Inc.
Fidelity VIP Growth Portfolio Fidelity Management & Research Company
Select Growth and Income Fund John A. Levin & Co., Inc.
Fidelity VIP Equity-Income
Portfolio Fidelity Management & Research Company
Fidelity VIP High Income
Portfolio Fidelity Management & Research Company
Select Income Fund Standish, Ayer & Wood, Inc.
Money Market Fund Allmerica Asset Management, Inc.
</TABLE>

10
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CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?

Yes. You may transfer among the Funds and the Fixed Account, subject to our
consent and then current rules. 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.

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 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."

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

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CAN I CONVERT MY POLICY INTO A NON-VARIABLE 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.

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 in Face Amount, we
deduct a charge of $40 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.

12
<PAGE>
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

- 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.

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.

WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?

The following table shows the expenses of the Funds for 1997. For more
information concerning fees and expenses, see the prospectuses of the Funds.

13
<PAGE>
CHARGES OF THE UNDERLYING FUNDS -- In addition to the charges described above,
certain fees and expenses are deducted from the assets of the Underlying Funds.
The levels of fees and expenses vary among the Underlying Funds. The following
table shows the expenses of the Underlying Funds for 1997. For more information
concerning fees and expenses, see the prospectuses of the Underlying Funds.

<TABLE>
<CAPTION>
TOTAL FUND
EXPENSES
MANAGEMENT FEE (AFTER ANY
(AFTER ANY OTHER FUND APPLICABLE
UNDERLYING FUND VOLUNTARY WAIVER) EXPENSES LIMITATIONS)
- -------------------------------------------------------------- ----------------------- --------------- ---------------
<S> <C> <C> <C>
Select Emerging Markets Fund @................................ 1.35% 0.65% 2.00%(1)
Select International Equity Fund.............................. 0.92%* 0.20% 1.12%(1)(3)
T. Rowe Price International Stock Portfolio................... 1.05% 0.00% 1.05%
Select Aggressive Growth Fund................................. 0.89%* 0.09% 0.98%(1)(3)
Select Capital Appreciation Fund.............................. 0.95%* 0.15% 1.10%(1)
Select Value Opportunity Fund................................. 0.90%** 0.14% 1.04%(1)(3)
Select Growth Fund............................................ 0.85%* 0.08% 0.93%(1)(3)
Select Strategic Growth Fund @................................ 0.85% 0.13% 0.98%(1)
Fidelity VIP Growth Portfolio................................. 0.60% 0.09% 0.69%(2)
Select Growth and Income Fund................................. 0.70%* 0.07% 0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio.......................... 0.50% 0.08% 0.58%(2)
Fidelity VIP High Income Portfolio............................ 0.59% 0.12% 0.71%
Select Income Fund............................................ 0.58%* 0.13% 0.71%(1)
Money Market Fund............................................. 0.27% 0.08% 0.35%(1)
</TABLE>

* Effective September 1, 1997, the management fee rates for these Funds were
revised. The management fee ratios shown in the table above have been
adjusted to assume that the revised rates took effect on January 1, 1997.
Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The new management fee rate has no effect on the management fee
rate for 1997.

@ Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expenses may be
greater or less than shown.

** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997
and until further notice, the management fee rate has been voluntarily
limited to an annual rate of 0.90% of average daily net assets, and total
expenses are limited to 1.25% of average daily net assets. The management
fee ratio shown above for the Select Value Opportunity Fund has been
adjusted to assume that the revised rate and the voluntarily limitations
that took effect on January 1, 1997. Without these adjustments, the
management fee ratio and the total fund expense ratio would have been 0.95%
and 1.09%, respectively. The management fee limitation may be terminated at
any time.

(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund,
1.25% for the Select Value Opportunity Fund, 1.20% for the Select Growth
Fund, 1.10% for the Select Growth and Income, 1.00% for the Select Income
Fund, and 0.60% for the Money Market Fund. The total operating expenses of
these Funds of the Trust were less than their respective expense limitations
throughout 1997.

Until further notice, AFIMS has declared a voluntary expense limitation of
1.20% of average daily net assets for the Select Strategic Growth Fund. In
addition, AFIMS has agreed to voluntarily waive its management fee to the
extent that expenses of the Select Emerging Markets Fund exceed 2.00% of the
Fund's average daily net assets, except that such waiver shall not exceed
the net amount of management fees earned by AFIMS from the Fund after
subtracting fees paid by AFIMS to a sub-adviser.

14
<PAGE>
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these Funds.
These limitations may be terminated at any time.

(2) A portion of the brokerage commissions that certain Funds pay was used to
reduce expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses presented
in the table would have been 0.57% for Fidelity VIP Equity-Income Portfolio,
and 0.67% for Fidelity VIP Growth Portfolio.

(3) These Funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating ratios would have been 0.93% for the Select
Aggressive Growth Fund, 0.98% for the Select Value Opportunity Fund, 1.10%
for the Select International Equity Fund, 0.91% for the Select Growth Fund,
0.98% for the Select Value Opportunity Fund, and 0.74% for the Select Growth
and Income Fund.

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. For more information, see
"Guaranteed Death Benefit Rider."

You may reinstate your Policy within three years after the grace period, within
limits.

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 Policy Owner 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

15
<PAGE>
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 payments. If
the 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% 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. We
do not claim that the Policy is similar or comparable to a systematic investment
plan of a mutual fund. The Policy and its attached application or enrollment
form are the entire agreement between you and the Company.

PERFORMANCE INFORMATION

The Policies were first offered to the public in 1997. However, we may advertise
"Total Return" and "Average Annual Total Return" performance information based
on the periods that the Underlying Funds have been in existence (Tables IA and
IB). 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.

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

16
<PAGE>
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 Analytical Services

- 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.

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/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues 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.

17
<PAGE>
In each table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1997. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.

TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE 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 (non-smoker) 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>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund -100.00% N/A -8.07%
T. Rowe Price International Stock Portfolio -100.00% N/A -10.81%
Select Aggressive Growth Fund -96.71% 6.12% 10.02%
Select Capital Appreciation Fund -100.00% N/A -8.48%
Select Value Opportunity Fund -91.22% N/A 4.79%
Select Growth Fund -82.95% 4.32% 6.57%
Select Strategic Growth Fund N/A N/A N/A
Fidelity VIP Growth Portfolio -92.43% 7.42% 12.76%
Select Growth and Income Fund -93.30% 5.88% 5.47%
Fidelity VIP Equity-Income Portfolio -88.29% 9.77% 12.27%
Fidelity VIP High Income Portfolio -97.64% 2.96% 8.24%
Select Income Fund -100.00% -4.90% -4.28%
Money Market Fund -100.00% -7.34% 0.89%
</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; 5/02/94 for Select
International Equity; 4/28/95 for the Select Capital Appreciation; 10/09/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP
High Income and 3/31/94 for the T. Rowe Price International Stock. The Select
Emerging Markets Fund and Select Strategic Growth Fund commenced operations in
February, 1998.

PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.

18
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF THE 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, all Sub-Account charges, and premium tax and
expense 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>
<CAPTION>
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF FUND
UNDERLYING FUND RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A
Select International Equity Fund 3.81% N/A 10.25%
T. Rowe Price International Stock Portfolio 2.27% N/A 7.20%
Select Aggressive Growth Fund 17.76% 15.86% 18.61%
Select Capital Appreciation Fund 13.37% N/A 21.90%
Select Value Opportunity Fund 23.85% N/A 15.99%
Select Growth Fund 33.00% 14.23% 15.44%
Select Strategic Growth Fund N/A N/A N/A
Fidelity VIP Growth Portfolio 22.50% 17.05% 16.25%
Select Growth and Income Fund 21.54% 15.64% 14.43%
Fidelity VIP Equity-Income Portfolio 27.09% 19.20% 15.78%
Fidelity VIP High Income Portfolio 16.73% 13.00% 11.91%
Select Income Fund 8.30% 6.00% 5.66%
Money Market Fund 4.63% 3.87% 4.95%
</TABLE>

19
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND THE UNDERLYING FUNDS

THE COMPANY

The Company, organized under the law of Massachusetts in 1844, is the fifth
oldest life insurance company in America. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. As of December 31, 1997, the Company and its subsidiaries had
over $22.4 billion in combined assets. The Company is a wholly owned subsidiary
of Allmerica Financial Corporation ("AFC"). The Company's Principal Office is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
508-855-1000 ("Principal Office").

The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.

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, 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 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 and affiliated insurance companies.
Shares of the Trust are not offered to the public but solely to the separate
accounts. Ten

20
<PAGE>
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.

AFIMS serves as investment manager of the Trust. AFIMS has entered into
agreements with other investment managers ("Sub-Advisers"), who manage the
investments of the Funds. See "Investment Advisory Services to 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 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, VIP AND T. ROWE PRICE
THAT ACCOMPANY THIS PROSPECTUS. THE PROSPECTUSES OF THE TRUST, 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 Capital Management International 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.

21
<PAGE>
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund will invest
primarily in common stock of industries and companies which are experiencing
favorable demand for their products and services, and which operate in a
favorable competitive environment and regulatory climate. The Sub-Adviser for
the Select Capital Appreciation Fund is T. Rowe Price Associates, Inc.

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.

SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.

FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation 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 John A. Levin & Co., Inc.

FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio 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 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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<PAGE>
INVESTMENT ADVISORY SERVICES

INVESTMENT ADVISORY SERVICES TO THE TRUST

The Trustees have responsibility for the supervision of the affairs of the
Trust. The Trustees have entered into a management agreement with AFIMS, an
indirectly wholly owned subsidiary of First Allmerica. 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. ("BARRA RogersCasey"), a pension
consulting firm. The cost of such consultation services is borne by AFIMS. As a
consultant, BARRA RogersCasey has no decision-making authority with respect to
the Funds, and is not responsible for any advice provided by AFIMS or the
Sub-Advisers.

Under each Sub-Adviser agreement, the Sub-Adviser is authorized to engage in
portfolio transactions on behalf of the Fund, subject to the Trustees'
instructions. The terms of a Sub-Adviser agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the Fund.
The Sub-Advisers (other than Allmerica Asset Management, Inc.) are not
affiliated with the Company or the Trust.

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<PAGE>
For providing its services under the management agreement, AFIMS receives a fee,
computed daily at an annual rate based on the average daily net asset value of
each fund as follows:

<TABLE>
<S> <C> <C>
Select Emerging Markets Fund * 1.35%
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.70%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>

* For the Select Emerging Markets Fund and the Select Strategic Growth Fund, the
investment management fee does not vary according to the level of assets in the
Fund. AFIMS' fee computed for each Fund will be paid from the assets of such
Fund.

Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreements, the Sub-Advisers are
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund. AFIMS is solely responsible for the payment of all fees for
investment management services to the Sub-Advisers.

AFIMS is solely responsible for the payment of all fees to Sub-Advisers for
their investment management services. Sub-Adviser fees, described in the Trust's
prospectus, in no way increase the costs that the Funds, Variable Account and
Policy Owners bear.

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<PAGE>
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP

For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectus of 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.

The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:

1. A group fee rate based on the monthly average net assets of all the mutual
Funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these Funds rise.

2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.

One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.

The Fidelity VIP Growth and the Fidelity VIP Equity-Income Portfolios' fee rates
are each made of two components:

1. A group fee rate based on the monthly average net assets of all of the
mutual Funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual Funds rise.

2. An individual Portfolio fee rate of 0.30% for the Fidelity VIP Growth
Portfolio and 0.20% for the Fidelity VIP Equity-Income Portfolio.

One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.

Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82%.
The Fidelity VIP Growth Portfolio may have a fee of as high as 0.82% of its
average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee as
high as 0.72% of its average net assets.

INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE

To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.

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.

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<PAGE>
If you made payments before the date of issuance 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.

If your Policy provides for a full refund under its "Right to Examine Policy"
provision as required in your state, 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

We may delay a refund of any payment made by check until the check has cleared
your bank.

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

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<PAGE>
- 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.

REPLACEMENT POLICIES

In New York, if you purchase a Policy to replace an existing life insurance
policy or annuity contract ("replacement") you may return the Policy within 60
days after receiving it. You may return the Policy by mailing it or delivering
it to the Principal Office or to an Agent of the Company. You will receive a
refund equal to the Surrender Value of the Policy plus all fees and charges.

CONVERSION PRIVILEGE

Within 24 months of the date of issue or an increase in Face Amount, you can
convert your Policy into a non-variable 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.

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 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

27
<PAGE>
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. The minimum amount
that you may allocate to a Sub-Account is 1.0% 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. We
require that callers on behalf of a policy owner identify themselves by name and
identify the policy owner by name, date of birth and social security number. 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. (You may not
transfer that portion of the Policy Value held in the Fixed Account that secures
a Policy loan.)

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 involving 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.

These rules are subject to change by the Company.

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<PAGE>
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 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

- To reallocate Policy Value among the Sub-Accounts on a quarterly,
semiannual or annual schedule.

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.

DEATH BENEFIT

If the Policy is in force on the Insured's death, we will, with due proof of
death, pay the Net Death Benefit 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

In most states, we will compute the Net Death Benefit on the date we receive due
proof of the Insured's death.

29
<PAGE>
GUARANTEED DEATH BENEFIT RIDER

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.

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.

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<PAGE>
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.

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).

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<PAGE>
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
(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

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<PAGE>
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

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 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 $40 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.

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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 inverse order.

On a decrease in the Face Amount, we will deduct 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 risks, administrative charges and fund expenses (see
"THE POLICY -- Application 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

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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.

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 Benefit 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."

CHARGES AND DEDUCTIONS

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 2.75% of each payment as a payment expense charge. This
charge includes a:

- Current premium tax deduction of 1.25%

- Current deferred acquisition costs ("DAC tax") deduction of 1.0%

- Front-end sales load of 0.5%

The 1.25% premium tax deduction approximates our average expenses for state and
local premium taxes. 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.

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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.

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

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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

- 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.

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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)

- 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, 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

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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 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 -- COMPUTING 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.

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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 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 in Face Amount, we will deduct a transaction charge of $40
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% (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. 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 preferred loans. 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;

- 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."

A QUALIFIED TAX ADVISER SHOULD BE CONSULTED BEFORE REQUESTING A POLICY LOAN.

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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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<PAGE>
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
proportionately.

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<PAGE>
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.

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 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 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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<PAGE>
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. As 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 is 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

48
<PAGE>
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 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 revoke your request for a preferred loan.

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 any policies covering the greater of (1) five individuals
or (2) the lesser of (a) 5% of the total number of officers and employees of
the corporation or (b) 20 individuals.

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.

49
<PAGE>
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 payments.

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% 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 12-month 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

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<PAGE>
We may disregard voting instructions Policy Owners or the Trustees initiate
in favor of any change in the investment policies or in any investment
adviser or principal underwriter. Our disapproval of any change must be
reasonable. A change in investment policies or investment adviser must be
based on a good faith determination that the change would be contrary to
state law or otherwise is improper under the objectives and purposes of the
Funds. If we do disregard voting instructions, we will include a summary of
and reasons for that action in the next report to Policy Owners.

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<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY

<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- -------------------------------- ---------------------------------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996; Vice President,
Director and Vice President First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996; Counsel, First
Secretary and Counsel Allmerica since 1991
Warren E. Barnes Vice President and Corporate Controller of First
Vice President and Corporate Allmerica since 1998; Vice President and Co-Controller,
Controller First Allmerica 1997; Vice President and Assistant
Controller, First Allmerica 1996 to 1997; Assistant Vice
President and Assistant Controller, First Allmerica 1995
to 1996; Assistant Vice President Corporate Accounting
and Reporting, First Allmerica 1993 to 1995
Robert E. Bruce Director and Chief Information Officer of First Allmerica
Director, Vice President and since 1997; Vice President of First Allmerica since 1995;
Chief Information Officer Corporate Manager, Digital Equipment Corporation 1979 to
1995
John P. Kavanaugh Director and Chief Investment Officer of First Allmerica
Director, Vice President and since 1996; Vice President, First Allmerica since 1991
Chief Investment Officer
John F. Kelly Director since 1996; General Counsel since 1981; Senior
Director, Senior Vice Vice President since 1986; and Assistant Secretary since
President, 1991, all of First Allmerica
General Counsel and Assistant
Secretary
J. Barry May Director of First Allmerica since 1996; Director of
Director Citizens Insurance Company and President, The Hanover
Insurance Company since 1996; Vice President, The Hanover
Insurance Company, 1993 to 1996; General Manager, The
Hanover Insurance Company, 1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996; Director since
Director 1992, President since 1994, and CEO since 1996 of
Citizens Insurance Company of America; Vice President
1982 to 1994, and Chief Investment Officer 1986 to 1994,
of First Allmerica
John F. O'Brien Director, Chairman of the Board, President and Chief
Director, Chairman of the Executive Officer, First Allmerica since 1989
Board,
President and Chief Executive
Officer
Edward J. Parry, III Director and Chief Financial Officer of First Allmerica
Director, Vice President, since 1996; Vice President and Treasurer, First Allmerica
Chief Financial Officer since 1993; Assistant Vice President, First Allmerica
and Treasurer 1992 to 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice President,
Director and Vice President First Allmerica since 1990; Director, Allmerica
Investments, Inc. since 1990; Director and President,
Allmerica Financial Investment Management Services, Inc.
since 1990
Robert P. Restrepo, Jr. Director and Vice President of First Allmerica since May,
Director and Vice President 1998; Chief Executive Officer, Travelers Property &
Casualty Group, 1996 to 1998; Senior Vice President,
Aetna Life & Casualty Company, 1993 to 1996.
Eric A. Simonsen Director of First Allmerica since 1996; Vice President,
Director and Vice President First Allmerica since 1990; Chief Financial Officer,
First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice President,
Director and Vice President First Allmerica since 1987
</TABLE>

52
<PAGE>
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 up to 90% of the first-year payments up to a payment
amount we established and 4% of any excess. Commissions will be up to 4% for
subsequent payments. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales-related
criteria. Other payments may be made for other services that do not directly
involve the 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.

SERVICES

The Company receives fees from the investment advisers or other service
providers of certain Sub-Accounts in return for providing certain services
to Policy Owners. Currently, the Company receives service fees with respect
to the Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio,
and Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the
aggregate net asset value, respectively, of the shares of such Sub-Accounts
held by the Variable Account. With respect to the T. Rowe Price
International Stock Portfolio, the Company receives service fees at an
annual rate of 0.15% per annum of the aggregate net asset value of shares
held by the Variable Account. The Company may in the future render services
for which it will receive compensation from the investment advisers or other
service providers of other Sub-Accounts.

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<PAGE>
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

- 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. 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, 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 is not involved in any litigation that is materially
important to its 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 VIP and T. Rowe Price are also issued to

54
<PAGE>
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, 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 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:

- 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

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.

TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS

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

55
<PAGE>
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.

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.

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.

INDEPENDENT ACCOUNTANTS

The financial statements of the Company as of December 31, 1997 and 1996 and
for each of the two years in the period ended December 31, 1997, included in
this Prospectus constituting part of this Registration Statement, have been
so included in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Policies.

YEAR 2000 DISCLOSURE

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.

Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The
Company is presently completing the process of modifying or replacing
existing software and believes that this action will resolve the Year 2000
issue. However, if such modifications and conversions are not made, or are
not completed timely, or should there be serious unanticipated interruptions
from unknown sources, the Year 2000 issue could have a material adverse
impact on the operations of the Company. Specifically, the Company could
experience, among other things, an interruption in its ability to collect
and process premiums, process claim payments, safeguard and manage its
invested assets, accurately maintain policyholder information, accurately
maintain accounting records, and perform customer service. Any of these
specific events, depending on duration, could have a material adverse impact
on the results of operations and the financial position of the Company.

The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year
2000 issue. The Company's total Year 2000 project cost and estimates to
complete the project include the estimated costs and time associated with
the impact of a third party's Year 2000 issue, and are based on presently
available information. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion
that is incompatible with the Company's systems, would not have material
adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material

56
<PAGE>
contingency associated with the Year 2000 project, there can be no assurance
that exposure for material contingencies will not arise.

The Company will utilize both internal and external resources to reprogram
or replace, and test both information technology and embedded technology
systems for Year 2000 modifications. The Company plans to complete the
mission critical elements of the Year 2000 by December 31, 1998. The cost of
the Year 2000 project will be expensed as incurred over the next two years
and is being funded primarily through a reallocation of resources from
discretionary projects. Therefore, the Year 2000 project is not expected to
result in any significant incremental technology cost and is not expected to
have a material effect on the results of operations. Through September 30,
1998, the Company and its subsidiaries have incurred and expensed
approximately $47 million related to the assessment of, and preliminary
efforts in connection with, the project and the development of a remediation
plan. The total remaining cost of the project is estimated at between $30-40
million.

The Company's contingency plans related to the Year 2000 issue are addressed
in a plan developed jointly with an outside vendor. The plan contains
immediate steps to keep business functions operating while unforeseen Year
2000 issues are being addressed. It outlines responses to situations that
may affect critical business functions and also provides triage guidance, a
documented order of actions to respond to problems. During the triage
process, business priorities are established and "Critical Points of
Failure" are identified as having a significant impact on the business. The
Company's contingency plans are designed to keep a business unit's operation
functioning in the event of a failure or delay due to Year 2000 record
format and date calculation changes.

The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those
plans. Specific factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
and similar uncertainties.

FINANCIAL STATEMENTS

Financial Statements for the Company are included in this Prospectus,
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.

57
<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%
45....................................................... 215%
50....................................................... 185%
55....................................................... 150%
60....................................................... 130%
65....................................................... 120%
70....................................................... 115%
75....................................................... 105%
80....................................................... 105%
85....................................................... 105%
90....................................................... 105%
95 and above............................................. 100%
</TABLE>

For the ages not listed, the progression between the listed ages is linear.

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 you 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 cost 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 Face 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 assume 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 rates of 0%, 6%, and 12%. The
second column of the tables show the amount which would accumulate if an amount
equal to the Guideline Annual Premium were invested each year to earn interest
(after taxes) at 5%, compounded annually.

The Policy Values and Death Benefits 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 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 1997 ranged from an
annual rate of 0.35% to an annual rate of 2.00% of average daily net assets. The
fees and expenses associated with 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.

AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Select Growth Fund, 1.10% for the Select Growth
and

D-1
<PAGE>
Income Fund, 1.00% for the Select Income Fund, and 0.60% for the Money Market
Fund. The total operating expenses of these Funds of the Trust were less than
their respective expense limitations throughout 1997. These limitations may be
terminated at any time.

Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
the manager has agreed to voluntarily waive its management fee to the extent
that expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's
average daily net assets, except that such waiver shall not exceed the net
amount of management fees earned by AFIMS from the Fund after subtracting fees
paid by AFIMS to a sub-adviser. These limitations may be terminated at any time.

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 table 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 rate 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>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT VARIABLE LIFE POLICY

MALE NON-SMOKER AGE 30

SPECIFIED FACE AMOUNT = $100,000

SUM INSURED OPTION 2

BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 691 1,768 101,768 803 1,880 101,880 915 1,993 101,993
2 4,305 2,429 3,506 103,506 2,764 3,841 103,841 3,112 4,189 104,189
3 6,620 4,270 5,213 105,213 4,942 5,884 105,884 5,669 6,611 106,611
4 9,051 6,082 6,890 106,890 7,207 8,015 108,015 8,473 9,281 109,281
5 11,604 7,853 8,526 108,526 9,550 10,224 110,224 11,539 12,213 112,213
6 14,284 9,583 10,121 110,121 11,975 12,514 112,514 14,893 15,431 115,431
7 17,098 11,285 11,689 111,689 14,498 14,902 114,902 18,576 18,980 118,980
8 20,053 12,947 13,217 113,217 17,109 17,378 117,378 22,611 22,880 122,880
9 23,156 14,572 14,706 114,706 19,814 19,948 119,948 27,033 27,167 127,167
10 26,414 16,158 16,158 116,158 22,615 22,615 122,615 31,881 31,881 131,881
11 29,834 17,593 17,593 117,593 25,414 25,414 125,414 37,110 37,110 137,110
12 33,426 18,989 18,989 118,989 28,318 28,318 128,318 42,865 42,865 142,865
13 37,197 20,345 20,345 120,345 31,332 31,332 131,332 49,200 49,200 149,200
14 41,157 21,660 21,660 121,660 34,459 34,459 134,459 56,172 56,172 156,172
15 45,315 22,932 22,932 122,932 37,701 37,701 137,701 63,848 63,848 163,848
16 49,681 24,168 24,168 124,168 41,069 41,069 141,069 72,304 72,304 172,304
17 54,265 25,358 25,358 125,358 44,559 44,559 144,559 81,612 81,612 181,612
18 59,078 26,511 26,511 126,511 48,183 48,183 148,183 91,868 91,868 191,868
19 64,132 27,625 27,625 127,625 51,946 51,946 151,946 103,170 103,170 203,245
20 69,439 28,700 28,700 128,700 55,852 55,852 155,852 115,620 115,620 220,833
Age 60 139,522 36,848 36,848 136,848 103,662 103,662 203,662 335,741 335,741 449,893
Age 65 189,673 38,752 38,752 138,752 134,443 134,443 234,443 557,131 557,131 679,700
Age 70 253,680 38,842 38,842 138,842 170,684 170,684 270,684 916,380 916,380 1,063,001
Age 75 335,370 36,058 36,058 136,058 212,377 212,377 312,377 1,501,118 1,501,118 1,606,196
</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 POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE 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>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT VARIABLE LIFE POLICY

MALE NON-SMOKER AGE 30

SPECIFIED FACE AMOUNT = $100,000

SUM INSURED OPTION 2

BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 688 1,766 101,766 800 1,878 101,878 912 1,990 101,990
2 4,305 2,420 3,498 103,498 2,755 3,832 103,832 3,103 4,180 104,180
3 6,620 4,254 5,197 105,197 4,924 5,867 105,867 5,650 6,592 106,592
4 9,051 6,055 6,863 106,863 7,177 7,985 107,985 8,440 9,248 109,248
5 11,604 7,813 8,487 108,487 9,504 10,178 110,178 11,486 12,159 112,159
6 14,284 9,529 10,067 110,067 11,909 12,448 112,448 14,813 15,351 115,351
7 17,098 11,214 11,618 111,618 14,407 14,811 114,811 18,462 18,866 118,866
8 20,053 12,858 13,127 113,127 16,990 17,259 117,259 22,454 22,723 122,723
9 23,156 14,461 14,595 114,595 19,661 19,795 119,795 26,823 26,957 126,957
10 26,414 16,024 16,024 116,024 22,423 22,423 122,423 31,607 31,607 131,607
11 29,834 17,429 17,429 117,429 25,171 25,171 125,171 36,750 36,750 136,750
12 33,426 18,797 18,797 118,797 28,023 28,023 128,023 42,408 42,408 142,408
13 37,197 20,118 20,118 120,118 30,971 30,971 130,971 48,621 48,621 148,621
14 41,157 21,403 21,403 121,403 34,033 34,033 134,033 55,458 55,458 155,458
15 45,315 22,643 22,643 122,643 37,200 37,200 137,200 62,970 62,970 162,970
16 49,681 23,836 23,836 123,836 40,477 40,477 140,477 71,227 71,227 171,227
17 54,265 24,985 24,985 124,985 43,869 43,869 143,869 80,306 80,306 180,306
18 59,078 26,079 26,079 126,079 47,369 47,369 147,369 90,276 90,276 190,276
19 64,132 27,129 27,129 127,129 50,992 50,992 150,992 101,244 101,244 201,244
20 69,439 28,126 28,126 128,126 54,733 54,733 154,733 113,295 113,295 216,394
Age 60 139,522 34,069 34,069 134,069 98,325 98,325 198,325 322,473 322,473 432,114
Age 65 189,673 32,872 32,872 132,872 123,432 123,432 223,432 527,790 527,790 643,904
Age 70 253,680 26,651 26,651 126,651 148,447 148,447 248,447 852,702 852,702 989,134
Age 75 335,370 12,348 12,348 112,348 169,364 169,364 269,364 1,369,243 1,369,243 1,469,243
</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.

D-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT VARIABLE LIFE POLICY

MALE NON-SMOKER AGE 45

SPECIFIED FACE AMOUNT = $250,000

SUM INSURED OPTION 1

BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,223 250,000 120 3,442 250,000 340 3,662 250,000
2 9,041 3,014 6,341 250,000 3,656 6,983 250,000 4,325 7,651 250,000
3 13,903 6,427 9,338 250,000 7,695 10,606 250,000 9,072 11,983 250,000
4 19,008 9,734 12,229 250,000 11,838 14,333 250,000 14,214 16,709 250,000
5 24,368 12,919 14,998 250,000 16,068 18,148 250,000 19,774 21,854 250,000
6 29,996 15,980 17,643 250,000 20,390 22,054 250,000 25,798 27,461 250,000
7 35,906 18,909 20,157 250,000 24,799 26,047 250,000 32,327 33,574 250,000
8 42,112 21,694 22,526 250,000 29,286 30,118 250,000 39,406 40,237 250,000
9 48,627 24,326 24,742 250,000 33,846 34,262 250,000 47,088 47,504 250,000
10 55,469 26,789 26,789 250,000 38,468 38,468 250,000 55,431 55,431 250,000
11 62,652 29,120 29,120 250,000 43,200 43,200 250,000 64,557 64,557 250,000
12 70,195 31,336 31,336 250,000 48,081 48,081 250,000 74,611 74,611 250,000
13 78,114 33,441 33,441 250,000 53,124 53,124 250,000 85,706 85,706 250,000
14 86,430 35,434 35,434 250,000 58,339 58,339 250,000 97,964 97,964 250,000
15 95,161 37,311 37,311 250,000 63,732 63,732 250,000 111,521 111,521 250,000
16 104,330 39,067 39,067 250,000 69,311 69,311 250,000 126,532 126,532 250,000
17 113,956 40,698 40,698 250,000 75,086 75,086 250,000 143,174 143,174 250,000
18 124,064 42,198 42,198 250,000 81,065 81,065 250,000 161,644 161,644 250,000
19 134,677 43,556 43,556 250,000 87,256 87,256 250,000 182,170 182,170 250,000
20 145,821 44,764 44,764 250,000 93,670 93,670 250,000 205,012 205,012 250,114
Age 60 95,161 37,311 37,311 250,000 63,732 63,732 250,000 111,521 111,521 250,000
Age 65 145,821 44,764 44,764 250,000 93,670 93,670 250,000 205,012 205,012 250,114
Age 70 210,477 48,605 48,605 250,000 129,877 129,877 250,000 360,006 360,006 417,607
Age 75 292,995 46,617 46,617 250,000 174,617 174,617 250,000 612,277 612,277 655,137
</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.

D-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SELECT VARIABLE LIFE POLICY

MALE NON-SMOKER AGE 45

SPECIFIED FACE AMOUNT = $250,000

SUM INSURED OPTION 1

BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS

<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN HYPOTHETICAL 12%
INTEREST ---------------------------- ----------------------------- GROSS INVESTMENT RETURN
AT 5% POLICY POLICY -------------------------------
POLICY PER YEAR SURRENDER VALUE DEATH SURRENDER VALUE DEATH SURRENDER POLICY DEATH
YEAR (1) VALUE (2) BENEFIT VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
------ --------- --------- ------- ------- --------- -------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,217 250,000 115 3,437 250,000 335 3,657 250,000
2 9,041 2,999 6,325 250,000 3,639 6,966 250,000 4,308 7,634 250,000
3 13,903 6,389 9,300 250,000 7,654 10,565 250,000 9,028 11,939 250,000
4 19,008 9,677 12,172 250,000 11,773 14,268 250,000 14,141 16,636 250,000
5 24,368 12,839 14,918 250,000 15,974 18,053 250,000 19,664 21,743 250,000
6 29,996 15,850 17,513 250,000 20,236 21,899 250,000 25,614 27,277 250,000
7 35,906 18,742 19,990 250,000 24,592 25,840 250,000 32,070 33,317 250,000
8 42,112 21,493 22,325 250,000 29,023 29,855 250,000 39,064 39,895 250,000
9 48,627 24,079 24,494 250,000 33,511 33,927 250,000 46,634 47,050 250,000
10 55,469 26,478 26,478 250,000 38,036 38,036 250,000 54,827 54,827 250,000
11 62,652 28,324 28,324 250,000 42,252 42,252 250,000 63,395 63,395 250,000
12 70,195 29,970 29,970 250,000 46,507 46,507 250,000 72,754 72,754 250,000
13 78,114 31,419 31,419 250,000 50,809 50,809 250,000 83,010 83,010 250,000
14 86,430 32,651 32,651 250,000 55,144 55,144 250,000 94,263 94,263 250,000
15 95,161 33,643 33,643 250,000 59,499 59,499 250,000 106,630 106,630 250,000
16 104,330 34,373 34,373 250,000 63,862 63,862 250,000 120,250 120,250 250,000
17 113,956 34,819 34,819 250,000 68,222 68,222 250,000 135,290 135,290 250,000
18 124,064 34,958 34,958 250,000 72,567 72,567 250,000 151,945 151,945 250,000
19 134,677 34,741 34,741 250,000 76,868 76,868 250,000 170,436 170,436 250,000
20 145,821 34,088 34,088 250,000 81,075 81,075 250,000 191,028 191,028 250,000
Age 60 95,161 33,643 33,643 250,000 59,499 59,499 250,000 106,630 106,630 250,000
Age 65 145,821 34,088 34,088 250,000 81,075 81,075 250,000 191,028 191,028 250,000
Age 70 210,477 22,896 22,896 250,000 100,188 100,188 250,000 330,932 330,932 383,881
Age 75 292,995 0 0 250,000 112,187 112,187 250,000 553,803 553,803 592,569
</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.

D-6
<PAGE>
APPENDIX E
COMPUTING 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
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
</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>
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
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>

E-2
<PAGE>
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 28.5% 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 $711.88.

E-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ------------------
(IN MILLIONS) 1998 1997 1998 1997
-------------------------------------------------- ------- ------ -------- --------
<S> <C> <C> <C> <C>
REVENUES
Premiums........................................ $ 570.1 $$585.6 $1,729.1 $1,726.7
Universal life and investment product policy
fees........................................ 75.0 61.4 217.2 174.8
Net investment income......................... 149.8 162.1 454.9 488.2
Net realized investment gains................. 9.3 19.1 54.8 60.8
Other income.................................. 34.4 29.5 102.7 86.4
------- ------ -------- --------
Total revenues............................ 838.6 857.7 2,558.7 2,536.9
------- ------ -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses......................... 523.9 515.1 1,548.9 1,516.1
Policy acquisition expenses................... 111.6 117.3 344.0 353.9
Loss from cession of disability income
business.................................... -- -- -- 53.9
Other operating expenses...................... 192.7 126.8 462.8 382.6
------- ------ -------- --------
Total benefits, losses and expenses....... 828.2 759.2 2,355.7 2,306.5
------- ------ -------- --------
Income before federal income taxes................ 10.4 98.5 203.0 230.4
------- ------ -------- --------
FEDERAL INCOME TAX (BENEFIT) EXPENSE
Current....................................... 13.7 34.7 59.1 67.7
Deferred...................................... (22.0) (7.7) (21.8) (11.2)
------- ------ -------- --------
Total federal income tax (benefit)
expense................................. (8.3) 27.0 37.3 56.5
------- ------ -------- --------
Income before minority interest............... 18.7 71.5 165.7 173.9
Minority interest............................. (16.5) (14.4) (43.1) (55.6)
------- ------ -------- --------
Net income................................ 2.2 57.1 122.6 118.3
OTHER COMPREHENSIVE (LOSS) INCOME
Net (depreciation) appreciation on available
for sale securities......................... (125.0) 96.9 (85.8) 123.2
Benefit (provision) for deferred federal
income taxes................................ 43.7 (33.9) 30.0 (43.1)
Minority interest............................. 25.8 (19.6) 14.2 (26.4)
------- ------ -------- --------
Other comprehensive (loss) income......... (55.5) 43.4 (41.6) 53.7
------- ------ -------- --------
Comprehensive (loss) income....................... $ (53.3) $100.5 $ 81.0 $ 172.0
------- ------ -------- --------
------- ------ -------- --------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

UF-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(IN MILLIONS) 1998 1997
----------------------------------------------- -------- --------
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period..... $ 5.0 $ 5.0
-------- --------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 453.7 392.5
Lost minority interest on capital
transactions............................. (9.6) --
-------- --------
Balance at end of period................... 444.1 392.5
-------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,567.4 1,367.4
Net income................................. 122.6 118.3
Dividends to shareholders.................. (50.0) --
-------- --------
Balance at end of period................... 1,640.0 1,485.7
-------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 209.3 131.4
Net (depreciation) appreciation on
available for sale securities............ (85.8) 123.2
Benefit (provision) for deferred federal
income taxes............................. 30.0 (43.1)
Minority interest.......................... 14.2 (26.4)
-------- --------
Other comprehensive (loss) income...... (41.6) 53.7
-------- --------
Balance at end of period................... 167.7 185.1
-------- --------
Total shareholder's equity............. $2,256.8 $2,068.3
-------- --------
-------- --------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

UF-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 1998 1997
---------------------------------------- ------------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value
(amortized cost of $7,535.8 and
$6,992.8).......................... $ 7,771.5 $ 7,253.5
Equity securities at fair value
(cost of $290.5 and $341.1)........ 371.9 479.0
Mortgage loans...................... 561.5 567.5
Real estate......................... 25.1 50.3
Policy loans........................ 153.4 141.9
Other long term investments......... 139.2 148.3
------------- ------------
Total investments............... 9,022.6 8,640.5
------------- ------------
Cash and cash equivalents............. 344.5 213.9
Accrued investment income............. 138.2 141.8
Deferred policy acquisition costs..... 1,108.3 965.5
Reinsurance receivables:
Future policy benefits.............. 331.5 307.1
Outstanding claims, losses and loss
adjustment expenses................ 611.2 626.7
Unearned premiums................... 45.8 32.9
Other............................... 166.7 73.5
------------- ------------
Total reinsurance receivables... 1,155.2 1,040.2
------------- ------------
Deferred federal income taxes......... 40.2 --
Premiums, accounts and notes
receivable.......................... 551.8 554.4
Other assets.......................... 442.9 373.0
Closed block assets................... 803.8 806.7
Separate account assets............... 11,424.9 9,755.4
------------- ------------
Total assets.................... $ 25,032.4 $22,491.4
------------- ------------
------------- ------------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............. $ 2,748.5 $ 2,598.5
Outstanding claims, losses and loss
adjustment expenses................ 2,855.8 2,825.0
Unearned premiums................... 883.4 846.8
Contractholder deposit funds and
other policy liabilities........... 2,567.1 1,852.7
------------- ------------
Total policy liabilities and
accruals........................ 9,054.8 8,123.0
------------- ------------
Expenses and taxes payable............ 598.7 662.6
Dividends payable to shareholders..... 15.0 --
Reinsurance premiums payable.......... 77.5 37.7
Short term debt....................... 58.5 33.0
Deferred federal income taxes......... -- 12.9
Long term debt........................ -- 2.6
Closed block liabilities.............. 878.4 885.6
Separate account liabilities.......... 11,420.4 9,749.7
------------- ------------
Total liabilities............... 22,103.3 19,507.1
------------- ------------
Minority interest............... 672.3 748.9
Commitments and contingencies (See
Note 9)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million
shares authorized, 500,000 shares
issued & outstanding................ 5.0 5.0
Additional paid in capital............ 444.1 453.7
Accumulated other comprehensive
income.............................. 167.7 209.3
Retained earnings..................... 1,640.0 1,567.4
------------- ------------
Total shareholder's equity...... 2,256.8 2,235.4
------------- ------------
Total liabilities and
shareholder's equity............ $ 25,032.4 $22,491.4
------------- ------------
------------- ------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

UF-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
(IN MILLIONS) 1998 1997
-------------------------------------------- -------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 122.6 $ 118.3
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Minority interest................... 43.1 55.6
Net realized gains.................. (54.4) (61.9)
Net amortization and depreciation... 13.3 20.3
Deferred federal income taxes....... (21.8) (11.2)
Change in deferred acquisition
costs............................. (143.2) (108.8)
Change in premiums and notes
receivable, net of reinsurance.... 42.9 (0.9)
Change in accrued investment
income............................ 2.9 7.2
Change in policy liabilities and
accruals, net..................... 211.4 (86.1)
Change in reinsurance receivable.... (115.0) 46.8
Change in expenses and taxes
payable........................... (46.0) (160.6)
Separate account activity, net...... 1.2 0.2
Loss from cession of disability
income business................... -- 53.9
Other, net.......................... (59.0) 258.1
-------------- --------------
Net cash (used in) provided by
operating activities.......... (2.0) 130.9
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 1,514.7 1,769.5
Proceeds from disposals of equity
securities............................ 228.3 126.6
Proceeds from disposals of other
investments........................... 78.9 96.0
Proceeds from mortgages matured or
collected............................. 147.5 157.4
Purchase of available-for-sale fixed
maturities............................ (2,086.6) (1,835.3)
Purchase of equity securities........... (111.3) (45.8)
Purchase of other investments........... (221.3) (94.3)
Capital expenditures.................... (4.3) (5.4)
Other investing activities.............. (7.9) 1.2
-------------- --------------
Net cash (used in) provided by
investing activities.............. (462.0) 169.9
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds.......... 1,167.1 173.8
Withdrawals from contractholder deposit
funds................................. (456.5) (501.2)
Change in short term debt............... 25.5 9.8
Change in long term debt................ (2.6) (0.1)
Dividends paid to shareholders.......... (35.0) (2.4)
Additional paid in capital.............. -- 0.1
Purchase of Minority interest........... (125.0) --
-------------- --------------
Net cash provided by (used in)
financing activities.............. 573.5 (320.0)
-------------- --------------
Net change in cash and cash equivalents..... 109.5 (19.2)
Net change in cash held in the Closed
Block...................................... 21.1 2.8
Cash and cash equivalents, beginning of
period..................................... 213.9 175.9
-------------- --------------
Cash and cash equivalents, end of period.... $ 344.5 $ 159.5
-------------- --------------
-------------- --------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

UF-4
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

First Allmerica Financial Life Insurance Company ("FAFLIC" or "the Company") is
a wholly owned subsidiary of Allmerica Financial Corporation ("AFC"). The
accompanying unaudited consolidated financial statements of FAFLIC have been
prepared in accordance with generally accepted accounting principles for stock
life insurance companies for interim financial information.

The interim consolidated financial statements of FAFLIC include the accounts of
First Allmerica Financial Life Insurance Company ("FAFLIC"), its wholly owned
life insurance subsidiary, Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property & Casualty Companies,
Inc. ("Allmerica P&C", a 70%-owned non-insurance holding company). The Closed
Block assets and liabilities at September 30, 1998 and December 31, 1997 are
presented in the consolidated financial statements as single line items. Results
of operations for the Closed Block for the third quarter and nine month period
ended September 30, 1998 and 1997 are included in other income in the
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated.

Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, the Hanover Insurance Company ("Hanover").
Hanover's 83.2%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.

The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments, consisting of only normal
and recurring adjustments, necessary for a fair presentation of the financial
position and results of operations. Certain reclassifications have been made to
the 1997 consolidated statements of income in order to conform to the 1998
presentation. The results of operations for the third quarter and nine months
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year. These financial statements should be read in
conjunction with the Company's 1997 Annual Audited Financial Statements.

2. NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" (Statement No. 133), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company believes that the adoption of this
statement will not have a material effect on the results of operations or
financial position.

In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP. 98-1"). SoP No. 98-1 requires
that certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP No. 98-1 effective January 1, 1998. The adoption of SoP No. 98-1 did not
have material effect on the results of operations or financial position for the
three months ended March 31, 1998. Through the nine months ended September 30,
1998, the adoption of this SoP resulted in an increase to pre-tax income of
approximately $7.5 million.

UF-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP No.
97-3"). SoP No. 97-3 provides guidance on when a liability should be recognized
for guaranty fund and other assessments and how to measure the liability. This
statement allows for the discounting of the liability if the amount and timing
of the cash payments are fixed and determinable. In addition, it provides
criteria for when an asset may be recognized for a portion or all of the
assessment liability or paid assessment that can be recovered through premium
tax offsets or policy surcharges. This statement is effective for fiscal years
beginning after December 15, 1998. The Company believes that the adoption of
this statement will not have a material effect on the results of operations or
financial position.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (Statement No. 130). Statement No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components of
comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and circumstances
from non-owner sources. This statement is effective for fiscal years beginning
after December 15, 1997. The Company has adopted Statement No. 130 for the first
quarter of 1998, resulting primarily in reporting unrealized gains and losses on
investments in debt and equity securities in comprehensive income.

In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information"(Statement No. 131). This statement establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise". Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted Statement No. 131 for the first
quarter of 1998, resulting in certain segment re-definitions which have no
impact on the consolidated results of operations. (See Note 7.)

3. PARENT COMPANY TRANSACTIONS

The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of Allmerica P&C that it did not already own, through its ownership of FAFLIC,
in exchange for cash of $425.6 million and approximately 9.7 million shares of
AFC stock valued at $372.5 million. At consummation of this transaction, AFC
owned 59.5% through FAFLIC and 40.5% directly.

The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to minority interest in the
assets and liabilities based on estimates of their fair values. The minority
acquired totaled $703.5 million. A total of $90.6 million representing the
excess of the purchase price over the fair values of the net assets acquired,
net of deferred taxes, has been allocated to goodwill and is being amortized
over a 40 year period. The pushdown of goodwill to APY resulted in an increase
to the consolidated equity of FAFLIC of $61.3 million as additional paid in
capital.

UF-6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.

In April 1998, APY redeemed 3,289.47 shares of its issued and outstanding common
stock owned by AFC for $125 million in cash and securities. The effect of this
transaction was to increase FAFLIC's ownership of APY by 4.28%.

4. SIGNIFICANT TRANSACTIONS

Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. This agreement did not have a
material effect on the Company's results of operations or financial position.

On January 1, 1998, substantially all of the Hanover and Citizens defined
benefit, defined contribution 401(K) and postretirement plans were merged with
the existing benefit plans of FAFLIC. The transfer of benefit plans did not have
a material impact on the results of operations or financial position of the
Company.

Effective July 1, 1998 the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, relating to the Company's accident and health assumed reinsurance pool
business. These pools consist primarily of the Corporate Risk Management
segment's assumed stop loss business, small group managed care pools, long-term
disability and long-term care pools, student accident and special risk business.
The agreement is consistent with management's decision to exit this line of
business, which the Company expects to run-off over the next three years. As a
result of this transaction, the Company recognized a $25.3 million pre-tax loss
in the third quarter of 1998.

On October 27, 1998, AFC announced that it, or one of its subsidiaries, shortly
will commence a cash tender offer to acquire the outstanding shares of Citizens
Corporation common stock that AFC or its subsidiaries do not already own at a
price of $29.00 per share. On November 2, 1998, AFC commenced the tender offer
which, unless extended, will expire on December 2, 1998. Based on the number of
shares of Citizens Corporation common stock held by unaffiliated stockholders,
the transaction is valued at $171.0 million. Citizens Corporation has
established a special committee of the Board of Directors, consisting of
directors unaffiliated with AFC, to study the offer and make a recommendation to
Citizens Corporation stockholders.

5. FEDERAL INCOME TAXES

Federal income tax expense for the periods ended September 30, 1998 and 1997,
has been computed using estimated effective tax rates. These rates are revised,
if necessary, at the end of each successive interim period to reflect the
current estimates of the annual effective tax rates.

6. CLOSED BLOCK

Included in other income in the Consolidated Statements of Income is a net
pre-tax contribution from the Closed Block of $0.1 million and $6.1 million for
the third quarter and nine months ended September 30,

UF-7
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1998, respectively, compared to $2.3 million and $8.3 million for the third
quarter and nine months ended September 30, 1997, respectively. Summarized
financial information of the Closed Block is as follows:

<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------------- ------------
<S> <C> <C>
ASSETS
Fixed maturities-at fair value (amortized cost of $396.7
and $400.1)........................................... $417.4 $412.9
Mortgage loans.......................................... 137.1 112.0
Policy loans............................................ 212.5 218.8
Cash and cash equivalents............................... 4.0 25.1
Accrued investment income............................... 14.8 14.1
Deferred policy acquisition costs....................... 15.9 18.2
Other assets............................................ 2.1 5.6
------ ------
Total assets........................................ $803.8 $806.7
------ ------
------ ------
LIABILITIES
Policy liabilities and accruals......................... $865.6 $875.1
Other liabilities....................................... 12.8 10.4
------ ------
Total liabilities................................... $878.4 $885.5
</TABLE>

<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
(IN MILLIONS) 1998 1997 1998 1997
- ------------------------------------------------------------ ----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES
Premiums................................................ $ 9.1 $ 9.3 $46.3 $48.3
Net investment income................................... 13.5 13.1 39.9 39.8
Net realized investment gains........................... (2.0) 0.1 (0.4) 1.1
----- ----- ----- -----
Total revenues...................................... 20.6 22.5 85.8 89.2
----- ----- ----- -----
BENEFITS AND EXPENSES
Policy benefits......................................... 19.5 19.3 76.9 78.4
Policy acquisition expenses............................. 0.9 0.7 2.2 2.1
Other operating expenses................................ 0.1 0.2 0.6 0.4
----- ----- ----- -----
Total benefits and expenses......................... 20.5 20.2 79.7 80.9
----- ----- ----- -----
Contribution from the Closed Block.............. $ 0.1 $ 2.3 $ 6.1 $ 8.3
----- ----- ----- -----
----- ----- ----- -----
</TABLE>

Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.

7. SEGMENT INFORMATION

The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in four operating segments.

UF-8
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Effective January 1, 1998, the Company adopted Statement No. 131. Upon adoption,
the separate financial information of each segment was re-defined consistent
with the way results are regularly evaluated by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. A
summary of the significant changes in reportable segments is included below.

The Risk Management group includes two segments: Property and Casualty and
Corporate Risk Management Services. The Property and Casualty segment includes
property and casualty insurance products, such as automobile insurance,
homeowners insurance, commercial multiple peril insurance, and workers'
compensation insurance. These products are offered by Allmerica P&C through its
operating subsidiaries, Hanover and Citizens. Substantially all of the Property
and Casualty segment's earnings are generated in Michigan and the Northeast
(Connecticut, Massachusetts, New York, New Jersey, New Hampshire, Rhode Island,
Vermont and Maine). The Corporate Risk Management Services segment includes
group life and health insurance products and services which assist employers in
administering employee benefit programs and in managing the related risks.

The Retirement and Asset Accumulation group includes two segments: Allmerica
Financial Services and Allmerica Asset Management. The Allmerica Financial
Services segment includes variable annuities, variable universal life and
traditional life insurance products distributed via retail channels as well as
group retirement products, such as defined benefit and 401(K) plans and
tax-sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing in
three types of Guaranteed Investment Contracts (GICs); the traditional GIC, the
synthetic GIC and the "floating rate" GIC. This segment is also a Registered
Investment Advisor providing investment advisory services, primarily to
affiliates, and to other institutions, such as insurance companies and pension
plans.

In addition to the four operating segments, the Company has a Corporate segment,
which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead expenses reflect
costs not attributable to a particular segment, such as those generated by
certain officers and directors, Corporate Technology, Corporate Finance, Human
Resources and the legal department.

Significant changes to the Company's segmentation include a reclassification of
corporate overhead expenses from each operating segment into the Corporate
segment. Additionally, certain products (group retirement products, such as
401(K) plans and tax-sheltered annuities, group variable universal life) and
certain other non-insurance operations (telemarketing and trust services)
previously reported in the Allmerica Financial Institutional Services segment
were combined with the Allmerica Financial Services segment. Also, the Company
reclassified the GIC product line previously reported in the Allmerica Financial
Institutional Services segment into the Allmerica Asset Management segment.

Management evaluates the results of the aforementioned segments based on pre-tax
segment income. Pre-tax segment income is determined by adjusting net income for
net realized investment gains and losses, net gains and losses on disposals of
businesses, extraordinary items, the cumulative effect of accounting changes and
certain other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of pre-tax segment income enhances its
understanding of the Company's results of operations by highlighting net income
attributable to the normal, recurring operations of the business. However,
pre-tax segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.

UF-9
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summarized below is financial information with respect to business segments for
the periods indicated.

<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
(IN MILLIONS) 1998 1997 1998 1997
---------------------------------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Segment revenues
Risk Management
Property and Casualty........... $545.0 $556.6 $1,654.4 $1,645.6
Corporate Risk Management
Services...................... 102.0 103.2 309.8 301.9
------ ------ ------------- ------------
Subtotal.................... 647.0 659.8 1,964.2 1,947.5
------ ------ ------------- ------------
Retirement and Asset Accumulation
Allmerica Financial Services.... 173.4 177.1 537.0 543.3
Allmerica Asset Management...... 32.8 22.3 86.6 69.8
------ ------ ------------- ------------
Subtotal.................... 206.2 199.4 623.6 613.1
------ ------ ------------- ------------
Corporate........................... (4.2) 2.2 2.0 4.1
Intersegment revenues............... (1.7) (2.8) (5.8) (8.8)
------ ------ ------------- ------------
Total segment revenues including
Closed Block.................. 847.3 858.6 2,584.0 2,555.9
Adjustment for Closed
Block..................... (22.5) (20.1) (80.1) (79.8)
Net realized gains
(losses).................. 13.8 19.2 54.8 60.8
------ ------ ------------- ------------
Total revenues.................. $838.6 $857.7 $2,558.7 $2,536.9
------ ------ ------------- ------------
------ ------ ------------- ------------
Segment income (loss) before income
taxes and minority interest:
Risk Management
Property and Casualty........... $23.5 $35.9 $98.0 $119.0
Corporate Risk Management
Services...................... 0.3 9.0 6.9 18.9
------ ------ ------------- ------------
Subtotal.................... 23.8 44.9 104.9 137.9
------ ------ ------------- ------------
Retirement and Asset Accumulation
Allmerica Financial Services.... 38.6 37.8 123.9 99.6
Allmerica Asset Management...... 6.9 5.2 17.0 13.8
------ ------ ------------- ------------
Subtotal.................... 45.5 43.0 140.9 113.4
------ ------ ------------- ------------
Corporate........................... (5.6) (11.4) (29.3) (28.7)
------ ------ ------------- ------------
Segment income before income
taxes and minority interest... 63.7 76.5 216.5 222.6
Adjustments to segment income:
Net realized investment gains, net
of amortization................... 3.2 19.7 43.8 61.9
Loss on cession of disability income
business.......................... -- -- -- (53.9)
Other items......................... (56.5) 2.3 (57.3) (0.2)
------ ------ ------------- ------------
Income before taxes and minority
interest............................... $10.4 $98.5 $203.0 $230.4
------ ------ ------------- ------------
------ ------ ------------- ------------
</TABLE>

<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
--------------------------- ---------------------------
(UNAUDITED) DECEMBER (UNAUDITED) DECEMBER
SEPTEMBER 30, 31, SEPTEMBER 30, 31,
(IN MILLIONS) 1998 1997 1998 1997
- --------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Risk Management
Property and Casualty................ $ 5,591.5 $ 5,650.4 $ 167.7 $167.2
Corporate Risk Management Services... 651.7 619.8 2.7 2.9
------------- ----------- ------------- -----------
Subtotal......................... 6,243.2 6,270.2 170.4 170.1
Retirement and Asset Accumulation
Allmerica Financial Services......... 16,990.7 15,159.2 937.2 794.5
Allmerica Asset Management........... 1,764.4 1,035.1 0.7 0.9
------------- ----------- ------------- -----------
Subtotal......................... 18,755.1 16,194.3 937.9 795.4
Corporate................................ 34.1 26.9 -- --
------------- ----------- ------------- -----------
Total................................ $25,032.4 $22,491.4 $1,108.3 $965.5
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
</TABLE>

UF-10
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES

LITIGATION

In July 1997, a lawsuit on behalf of a punitive class was instituted in
Louisiana against AFC and certain of its subsidiaries by individual plaintiffs
alleging fraud, unfair or deceptive acts, breach of contract, misrepresentation,
and related claims in the sale of life insurance policies. In October 1997,
plaintiffs voluntarily dismissed the Louisiana suit and filed a substantially
similar action in Federal District Court in Worcester, Massachusetts. The
Company and the plaintiffs have entered into a settlement agreement which they
will present to the court for approval. Although the Company believes it has
meritorious defenses to plaintiffs' claims, it concluded that this settlement
was best for the Company. Accordingly, the Company recognized a $31.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes it has established an appropriate reserve, this
reserve may be revised based on changes in the Company's estimate of the
ultimate cost of the settlement.

YEAR 2000

The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.

Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.

UF-11
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

PRICE WATERHOUSE LLP

Boston, Massachusetts

February 3, 1998
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums................................... $2,311.0 $2,236.3 $2,222.8
Universal life and investment product
policy fees............................... 237.3 197.2 172.4
Net investment income...................... 641.8 670.8 710.5
Net realized investment gains.............. 76.5 66.8 19.1
Realized gain from sale of mutual fund
processing business....................... -- -- 20.7
Other income............................... 117.6 108.4 109.3
--------- --------- ---------
Total revenues......................... 3,384.2 3,279.5 3,254.8
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 2,004.6 1,957.0 2,010.3
Policy acquisition expenses................ 425.1 470.1 470.9
Loss from cession of disability income
business.................................. 53.9 -- --
Other operating expenses................... 523.7 503.2 468.7
--------- --------- ---------
Total benefits, losses and expenses.... 3,007.3 2,930.3 2,949.9
--------- --------- ---------
Income before federal income taxes......... 376.9 349.2 304.9
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 83.3 96.8 119.7
Deferred................................... 14.2 (15.7) (37.0)
--------- --------- ---------
Total federal income tax expense....... 97.5 81.1 82.7
--------- --------- ---------
Income before minority interest................ 279.4 268.1 222.2
Minority interest.............................. (79.4) (74.6) (73.1)
--------- --------- ---------
Income before extraordinary item............... 200.0 193.5 149.1
Extraordinary item -- demutualization
expenses...................................... -- -- (12.1)
--------- --------- ---------
Net income..................................... $ 200.0 $ 193.5 $ 137.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$6,992.8 and $7,279.1)............................. $ 7,253.5 $ 7,461.5
Equity securities at fair value (cost of $341.1 and
$327.9)............................................ 479.0 473.1
Mortgage loans...................................... 567.5 650.1
Real estate......................................... 50.3 120.7
Policy loans........................................ 141.9 132.4
Other long term investments......................... 148.3 128.8
---------- ----------
Total investments............................... 8,640.5 8,966.6
---------- ----------
Cash and cash equivalents............................. 213.9 175.9
Accrued investment income............................. 141.8 148.6
Deferred policy acquisition costs..................... 965.5 822.7
---------- ----------
Reinsurance receivables:
Future policy benefits.............................. 307.1 102.8
Outstanding claims, losses and loss adjustment
expenses........................................... 626.7 663.8
Unearned premiums................................... 32.9 46.2
Other............................................... 73.5 62.8
---------- ----------
Total reinsurance receivables................... 1,040.2 875.6
---------- ----------
Deferred federal income taxes......................... -- 66.9
Premiums, accounts and notes receivable............... 554.4 533.0
Other assets.......................................... 373.0 304.4
Closed block assets................................... 806.7 810.8
Separate account assets............................... 9,755.4 6,233.0
---------- ----------
Total assets.................................... $22,491.4 $18,937.5
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,598.5 $ 2,613.7
Outstanding claims, losses and loss adjustment
expenses........................................... 2,825.0 2,944.1
Unearned premiums................................... 846.8 822.5
Contractholder deposit funds and other policy
liabilities........................................ 1,852.7 2,060.4
---------- ----------
Total policy liabilities and accruals........... 8,123.0 8,440.7
---------- ----------
Expenses and taxes payable............................ 662.6 617.5
Reinsurance premiums payable.......................... 37.7 31.4
Short term debt....................................... 33.0 38.4
Deferred federal income taxes......................... 12.9 --
Long term debt........................................ 2.6 2.7
Closed block liabilities.............................. 885.6 899.4
Separate account liabilities.......................... 9,749.7 6,227.2
---------- ----------
Total liabilities............................... 19,507.1 16,257.3
---------- ----------
Minority interest..................................... 748.9 784.0
Commitments and contingencies (Notes 13 and 18)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,000 shares issued and outstanding... 5.0 5.0
Additional paid in capital............................ 453.7 392.4
Unrealized appreciation on investments, net........... 209.3 131.4
Retained earnings..................................... 1,567.4 1,367.4
---------- ----------
Total shareholder's equity...................... 2,235.4 1,896.2
---------- ----------
Total liabilities and shareholder's equity...... $22,491.4 $18,937.5
---------- ----------
---------- ----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
----------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 5.0 $ 5.0 $ --
Demutualization transaction................ -- -- 5.0
--------- --------- ---------
Balance at end of period................... 5.0 5.0 5.0
--------- --------- ---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of period............. 392.4 392.4 --
Contributed from parent.................... 61.3 -- 392.4
--------- --------- ---------
Balance at end of period................... 453.7 392.4 392.4
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 1,367.4 1,173.9 1,071.4
Net income prior to demutualization........ -- -- 93.2
--------- --------- ---------
1,367.4 1,173.9 1,164.6
Demutualization transaction................ -- -- (34.5)
Net income subsequent to demutualization... 200.0 193.5 43.8
--------- --------- ---------
Balance at end of period................... 1,567.4 1,367.4 1,173.9
--------- --------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 131.4 153.0 (79.0)
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities........................ -- -- 22.4
Provision for deferred federal income taxes
and minority interest..................... -- -- (9.6)
--------- --------- ---------
-- -- 12.8
--------- --------- ---------
Net appreciation (depreciation) on
available for sale securities............. 170.9 (35.1) 466.0
(Benefit) provision for deferred federal
income taxes.............................. (59.8) 11.8 (163.1)
Minority interest.......................... (33.2) 1.7 (83.7)
--------- --------- ---------
209.3 (21.6) 219.2
--------- --------- ---------
Balance at end of period................... 209.3 131.4 153.0
--------- --------- ---------
Total shareholder's equity............. $2,235.4 $1,896.2 $1,724.3
--------- --------- ---------
--------- --------- ---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
-------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.0 $ 193.5 $ 137.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 79.4 74.6 73.1
Net realized gains.................. (77.8) (66.8) (39.8)
Net amortization and depreciation... 31.6 44.7 57.7
Deferred federal income taxes....... 14.2 (15.7) (37.0)
Change in deferred acquisition
costs............................... (189.7) (73.9) (38.4)
Change in premiums and notes
receivable, net of reinsurance...... (15.1) (16.8) (42.0)
Change in accrued investment
income.............................. 7.1 16.7 7.0
Change in policy liabilities and
accruals, net....................... (134.9) (184.3) 116.2
Change in reinsurance receivable.... 27.2 123.8 (75.6)
Change in expenses and taxes
payable............................. 49.4 26.0 7.5
Separate account activity, net...... -- 5.2 (0.1)
Loss from cession of disability
income business..................... 53.9 -- --
Payment related to cession of
disability income business.......... (207.0) -- --
Other, net.......................... 20.4 38.5 (33.8)
---------- ---------- ----------
Net cash (used in) provided by
operating activities......... (141.3) 165.5 131.8
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 2,947.9 3,985.8 2,738.4
Proceeds from disposals of
held-to-maturity fixed maturities...... -- -- 271.3
Proceeds from disposals of equity
securities............................. 162.7 228.7 120.0
Proceeds from disposals of other
investments............................ 116.3 99.3 40.5
Proceeds from mortgages matured or
collected.............................. 204.7 176.9 230.3
Purchase of available-for-sale fixed
maturities............................. (2,596.0) (3,771.1) (3,273.3)
Purchase of equity securities........... (67.0) (90.9) (254.0)
Purchase of other investments........... (175.0) (168.0) (24.8)
Proceeds from sale of mutual fund
processing business.................... -- -- 32.9
Capital expenditures.................... (15.3) (12.8) (14.1)
Other investing activities, net......... 1.3 4.3 4.7
---------- ---------- ----------
Net cash provided by (used in)
investing activities................ 579.6 452.2 (128.1)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds........... 457.6 268.7 445.8
Withdrawals from contractholder deposit
funds.................................. (647.1) (905.0) (1,069.9)
Change in short term debt............... (5.4) 10.4 (4.8)
Change in long term debt................ (0.1) (0.1) 0.2
Dividends paid to minority
shareholders........................... (9.4) (3.9) (4.1)
Additional paid in capital.............. 0.1 -- 392.4
Payments to policyholders' membership
interests.............................. -- -- (27.9)
Subsidiary treasury stock purchased, at
cost................................... (195.0) (42.0) (20.9)
---------- ---------- ----------
Net cash used in financing
activities................... (399.3) (671.9) (289.2)
---------- ---------- ----------
Net change in cash and cash equivalents..... 39.0 (54.2) (285.5)
Net change in cash held in the Closed
Block...................................... (1.0) (6.5) (17.6)
Cash and cash equivalents, beginning of
period..................................... 175.9 236.6 539.7
---------- ---------- ----------
Cash and cash equivalents, end of period.... $ 213.9 $ 175.9 $ 236.6
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.6 $ 18.6 $ 4.1
Income taxes paid....................... $ 66.3 $ 72.0 $ 90.6
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

First Allmerica Financial Life Insurance Company ("FAFLIC", or the "Company")
was organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of reorganization
effective October 16, 1995 and became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC"). The consolidated financial statements have been
prepared as if FAFLIC were organized as a stock life insurance company for all
periods presented. Thus, generally accepted accounting principles for stock life
insurance companies have been applied retroactively for all periods presented.

The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), its wholly
owned life insurance subsidiary, non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property and
Casualty Companies, Inc. (a 65.78%-owned non-insurance holding company). The
Closed Block assets and liabilities at December 31, 1997 and 1996, and its
results of operations subsequent to demutualization are presented in the
consolidated financial statements as single line items. Unless specifically
stated, all disclosures contained herein supporting the consolidated financial
statements at December 31, 1997 and 1996, and the years then ended exclude the
Closed Block related amounts. All significant intercompany accounts and
transactions have been eliminated.

Minority interest relates to the Company's investment in Allmerica P&C (APY) and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company
for Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.

APY and a wholly-owned subsidiary of AFC merged on July 16, 1997. Through the
merger, AFC acquired all of the outstanding common stock of Allmerica P&C that
it did not already own in exchange for cash and stock. The merger has been
accounted for as a purchase. A total of $90.6 million, representing the excess
of the purchase price over the fair values of the net assets acquired, net of
deferred taxes, has been allocated to goodwill and is being amortized over a
40-year period. Additional information pertaining to the merger agreement is
included in Note 2, significant transactions.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

B. CLOSED BLOCK

As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On October
16, 1995, FAFLIC, allocated to the Closed Block, assets in an amount that is
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy

F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

benefits, certain future expenses and taxes and for continuation of policyholder
dividend scales in effect in 1994 so long as the experience underlying such
dividend scales continues. The Company expects that the factors underlying such
experience will fluctuate in the future and policyholder dividend scales for
Closed Block Business will be set accordingly.

Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets at October 16, 1995 measured
on a GAAP basis represent the expected future post-tax income from the Closed
Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.

If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at October 16, 1995, the
expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.

If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.

C. VALUATION OF INVESTMENTS

In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.

In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholder's equity of $12.8 million.

Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.

Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers

F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

of mortgage loans to real estate (upon foreclosure), on the disposition or
settlement of mortgage loans and on mortgage loans which the Company believes
may not be collectible in full. In establishing reserves, the Company considers,
among other things, the estimated fair value of the underlying collateral.

Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.

Policy loans are carried principally at unpaid principal balances.

During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.

Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.

D. FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, and interest rate futures contracts. These instruments involve
credit risk and also may be subject to risk of loss due to interest rate
fluctuation. The Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other security to
minimize losses.

Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge foreign
currency exchange risk are accounted for using a combination of the fair value
method and accrual method, with changes in fair value reported in unrealized
gains and losses in equity consistent with the underlying hedged security, and
the net payment or receipt on the swaps reported in net investment income.
Futures contracts used to hedge interest rate risk are accounted for using the
deferral method, with gains and losses deferred in unrealized gains and losses
in equity and recognized in earnings in conjunction with the earnings
recognition of the underlying hedged item. Other swap contracts entered into for
investment purposes are accounted for using the fair value method, with changes
in fair value reported in realized investment gains and losses in earnings.

E. CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.

F. DEFERRED POLICY ACQUISITION COSTS

Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition

F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

costs related to universal life products, variable annuities and contractholder
deposit funds are deferred and amortized in proportion to total estimated gross
profits from investment yields, mortality, surrender charges and expense margins
over the expected life of the contracts. This amortization is reviewed annually
and adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from this group of products, including
realized and unrealized gains and losses from investments. Acquisition costs
related to fixed annuities and other life insurance products are deferred and
amortized, generally in proportion to the ratio of annual revenue to the
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.

Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, management
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.

G. PROPERTY AND EQUIPMENT

Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.

H. SEPARATE ACCOUNTS

Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.

I. POLICY LIABILITIES AND ACCRUALS

Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Liabilities for
outstanding claims, losses and loss adjustment expenses are estimates of
payments to be made on property and casualty and health insurance for reported
losses and estimates of losses incurred but not reported. These liabilities are
determined using case basis evaluations and statistical analyses and represent
estimates of the ultimate cost of all losses incurred but not paid. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in

F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

current operations. Estimated amounts of salvage and subrogation on unpaid
property and casualty losses are deducted from the liability for unpaid claims.

Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.

Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.

J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES

Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values. Certain policy charges that represent compensation for
services to be provided in future periods are deferred and amortized over the
period benefited using the same assumptions used to amortize capitalized
acquisition costs.

K. POLICYHOLDER DIVIDENDS

Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.

Prior to demutualization, the participating life insurance in force was 16.2% of
the face value of total life insurance in force at December 31, 1994. The
premiums on participating life, health and annuity policies were 11.3% and 6.4%
of total life, health and annuity statutory premiums prior to demutualization in
1995 and 1994, respectively. Total policyholders' dividends were $23.3 million
and $32.8 million prior to demutualization in 1995 and 1994, respectively.

F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

L. FEDERAL INCOME TAXES

AFC, its life insurance subsidiaries, FAFLIC, AFLIAC, and its non-life insurance
domestic subsidiaries file a life-nonlife consolidated United States Federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. APY and its subsidiaries will be included in the AFC consolidated return
as part of the non-life insurance company subgroup for the period July 17, 1997
through December 31, 1997. For the period January 1, 1997 through July 16, 1997,
APY and its subsidiaries will file a separate consolidated United States Federal
income tax return.

The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.

Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.

M. NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, Financial Reporting for Segments of a Business
Enterprise. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.

In June 1997, the FASB also issued Statement No. 130, Reporting Comprehensive
Income, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.

N. RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

2. SIGNIFICANT TRANSACTIONS

On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.

The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.

The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.

The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:

<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------
<S> <C>
Revenue........................................................................................ $ (6.7)
-----
-----
Realized capital gains included in revenue..................................................... $ (4.9)
-----
-----
Net income..................................................................................... $ (6.1)
-----
-----
Unrealized appreciation on investments......................................................... $ 4.4
-----
-----
</TABLE>

On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.

Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.

Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of

F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

$21.00 per share in a public offering, resulting in net proceeds of $248.0
million, and issued Senior Debentures in the principal amount of $200.0 million
which resulted in net proceeds of $197.2 million. AFC contributed $392.4 million
of these proceeds to FAFLIC.

Effective March 31, 1995, the Company entered into an agreement with TSSG, a
division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996, related to the aforementioned sale.

3. INVESTMENTS

A. SUMMARY OF INVESTMENTS

The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with SFAS No. 115.

The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 265.3 $ 9.5 $ 0.9 $ 273.9
States and political subdivisions....... 2,200.6 78.3 3.1 2,275.8
Foreign governments..................... 110.8 8.5 2.2 117.1
Corporate fixed maturities.............. 4,041.6 175.1 12.2 4,204.5
Mortgage-backed securities.............. 374.5 9.7 2.0 382.2
--------- ---------- ----------- --------
Total fixed maturities.................. $ 6,992.8 $281.1 $ 20.4 $7,253.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 341.1 $141.9 $ 4.0 $ 479.0
--------- ---------- ----------- --------
--------- ---------- ----------- --------

1996
-----------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 273.6 $ 9.3 $ 1.6 $ 281.3
States and political subdivisions....... 2,236.9 48.5 7.7 2,277.7
Foreign governments..................... 108.0 7.3 -- 115.3
Corporate fixed maturities.............. 4,277.5 140.3 15.7 4,402.1
Mortgage-backed securities.............. 383.1 4.7 2.7 385.1
--------- ---------- ----------- --------
Total fixed maturities.................. $ 7,279.1 $210.1 $ 27.7 $7,461.5
--------- ---------- ----------- --------
--------- ---------- ----------- --------
Equity securities....................... $ 327.9 $148.9 $ 3.7 $ 473.1
--------- ---------- ----------- --------
--------- ---------- ----------- --------
</TABLE>

(1) Amortized cost for fixed maturities and cost for equity securities.

In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market

F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

value of assets on deposit were $276.8 million and $291.7 million, respectively.
At December 31, 1996, the amortized cost and market value of assets on deposit
were $284.9 million and $292.2 million, respectively.

In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.1 million and $98.0 million were on deposit
with various state and governmental authorities at December 31, 1997 and 1996,
respectively.

There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.

The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.

<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ---------------------------------------- --------- --------

<S> <C> <C>
Due in one year or less................. $ 464.5 $ 467.7
Due after one year through five years... 2,142.9 2,225.7
Due after five years through ten
years.................................. 2,137.3 2,217.1
Due after ten years..................... 2,248.1 2,343.0
--------- --------
Total................................... $ 6,992.8 $7,253.5
--------- --------
--------- --------
</TABLE>

The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:

<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31 VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- --------------------------------------------- ------------------ ----- ------

<S> <C> <C> <C>
1997
Fixed maturities............................. $1,894.8 $27.6 $ 16.2
Equity securities............................ $ 145.5 $55.8 $ 1.3
1996
Fixed maturities............................. $2,432.8 $19.3 $ 30.5
Equity securities............................ $ 228.1 $56.1 $ 1.3
1995
Fixed maturities............................. $1,612.3 $23.7 $ 33.0
Equity securities............................ $ 122.2 $23.1 $ 6.9
</TABLE>

F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:

<TABLE>
<CAPTION>
EQUITY
SECURITIES
FOR THE YEARS ENDED DECEMBER 31 FIXED AND OTHER
(IN MILLIONS) MATURITIES (1) TOTAL
- ------------------------------------------------------------ ---------- ----------- -------

<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $ 131.4
Net appreciation (depreciation) on available-for-sale
securities.............................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C........................................... 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................ (65.9) (27.1) (93.0)
---------- ----------- -------
51.3 26.6 77.9
---------- ----------- -------
Net appreciation, end of year............................... $122.6 $ 86.7 $ 209.3
---------- ----------- -------
---------- ----------- -------

1996
Net appreciation, beginning of year......................... $108.7 $ 44.3 $ 153.0
Net (depreciation) appreciation on available-for-sale
securities.............................................. (94.1) 35.9 (58.2)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............. 23.1 -- 23.1
Provision for deferred federal income taxes and minority
interest................................................ 33.6 (20.1) 13.5
---------- ----------- -------
(37.4) 15.8 (21.6)
---------- ----------- -------
Net appreciation, end of year............................. $ 71.3 $ 60.1 $ 131.4
---------- ----------- -------
---------- ----------- -------

1995
Net appreciation (depreciation), beginning of year.......... $(89.4) $ 10.4 $ (79.0)
Effect of transfer of securities between classifications:
Net appreciation on available-for-sale securities......... 29.2 -- 29.2
Net depreciation from the effect of accounting change on
deferred policy acquisition costs and on policy
liabilities............................................. (6.8) -- (6.8)
Provision for deferred federal income taxes and minority
interest................................................ (9.6) -- (9.6)
---------- ----------- -------
12.8 -- 12.8
---------- ----------- -------
Net appreciation on available-for-sale securities........... 465.4 87.5 552.9
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (86.9) (86.9)
Provision for deferred federal income taxes and minority
interest................................................... (193.2) (53.6) (246.8)
---------- ----------- -------
185.3 33.9 219.2
---------- ----------- -------
Net appreciation, end of year............................... $108.7 $ 44.3 $ 153.0
---------- ----------- -------
---------- ----------- -------
</TABLE>

(1) Includes net appreciation on other investments of $1.8 million, $0.6
million, and 2.2 million in 1997, 1996 and 1995, respectively.

B. MORTGAGE LOANS AND REAL ESTATE

FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.

F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------

<S> <C> <C>
Mortgage loans.......................... $567.5 $ 650.1
Real estate:
Held for sale......................... 50.3 110.4
Held for production of income......... -- 10.3
------ --------
Total real estate................... 50.3 120.7
------ --------
Total mortgage loans and real estate.... $617.8 $ 770.8
------ --------
------ --------
</TABLE>

Reserves for mortgage loans were $20.7 million and $19.6 million at December 31,
1997 and 1996, respectively.

During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $54.7 million were written down to the estimated fair value less cost
to sell of $50.3 million, and a net realized investment loss of $4.4 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.

There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996 and 1995, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million and $26.1 million,
respectively.

At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $39.4 million, of which $10.0
million related to the Closed Block. These commitments generally expire within
one year.

Mortgage loans and real estate investments comprised the following property
types and geographic regions:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ---------------------------------------- ------ --------

<S> <C> <C>
Property type:
Office building....................... $265.1 $ 317.1
Residential........................... 66.6 95.4
Retail................................ 132.8 177.0
Industrial/warehouse.................. 107.2 124.8
Other................................. 66.8 91.0
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
Geographic region:
South Atlantic........................ 173.4 227.0
Pacific............................... 152.8 154.4
East North Central.................... 102.0 119.2
Middle Atlantic....................... 73.8 112.6
West South Central.................... 34.9 41.6
New England........................... 46.9 50.9
Other................................. 54.7 99.6
Valuation allowances.................. (20.7) (34.5)
------ --------
Total................................... $617.8 $ 770.8
------ --------
------ --------
</TABLE>

F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $136.4 million; 1999 -- $70.8 million; 2000 -- $129.2 million; 2001 -- $26.4
million; 2002 -- $29.9 million; and $174.8 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.

C. INVESTMENT VALUATION ALLOWANCES

Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------

<S> <C> <C> <C> <C>
1997
Mortgage loans........... $19.6 $ 2.5 $ 1.4 $20.7
Real estate.............. 14.9 6.0 20.9 --
----- --------- ----- -----
Total................ $34.5 $ 8.5 $22.3 $20.7
----- --------- ----- -----
----- --------- ----- -----

1996
Mortgage loans........... $33.8 $ 5.5 $19.7 $19.6
Real estate.............. 19.6 -- 4.7 14.9
----- --------- ----- -----
Total................ $53.4 $ 5.5 $24.4 $34.5
----- --------- ----- -----
----- --------- ----- -----

1995
Mortgage loans........... $47.2 $ 1.5 $14.9 $33.8
Real estate.............. 22.9 (0.6) 2.7 19.6
----- --------- ----- -----
Total................ $70.1 $ 0.9 $17.6 $53.4
----- --------- ----- -----
----- --------- ----- -----
</TABLE>

The carrying value of impaired loans was $30.5 million and $33.6 million, with
related reserves of $13.8 million and $11.9 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.

The average carrying value of impaired loans was $30.8 million, $50.4 million
and $117.9 million, with related interest income while such loans were impaired
of $3.2 million, $5.8 million and $9.3 million as of December 31, 1997, 1996 and
1995, respectively.

D. FUTURES CONTRACTS

The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.

There were no futures contracts outstanding at December 31, 1997, and $(33.0)
million notional amount of short contracts at December 31, 1996. The notional
amounts of the contracts represent the extent of the

F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Company's investment but not the future cash requirements, as the Company
generally settles open positions prior to maturity. The fair value of futures
contracts outstanding were $(32.4) million at December 31, 1996.

Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. There
were no deferred hedging gains (losses) in 1997. Deferred hedging gains were
$0.5 million and $5.6 million in 1996 and 1995, respectively. Gains and losses
on hedge contracts that are deemed ineffective by the Company are realized
immediately.

A reconciliation of the notional amount of futures contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $(33.0) $ 74.7 $126.6
New contracts................................ (0.2) (1.1) 349.2
Contracts terminated......................... 33.2 (106.6) (401.1)
------ ------ ------
Contracts outstanding, end of year........... -- $(33.0) $ 74.7
------ ------ ------
------ ------ ------
</TABLE>

E. FOREIGN CURRENCY SWAP CONTRACTS

The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed upon in the swap contract, and the foreign currency spot rate on the date
of the exchange. The fair values of the foreign currency swap contracts
outstanding were $0.1 million and $(9.2) million at December 31, 1997 and 1996,
respectively. Changes in the fair value of contracts are reported in unrealized
gains or losses, consistent with the reporting for the underlying hedged
security. The Company does not require collateral or other security to support
financial instruments with credit risk.

The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1997, 1996 and 1995. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gains or losses on
foreign currency swap contracts.

A reconciliation of the notional amount of swap contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 68.6 $104.6 $118.7
New contracts................................ 5.0 -- --
Contracts expired............................ (18.2) (36.0) --
Contracts terminated......................... -- -- (14.1)
------ ------ ------
Contracts outstanding, end of year........... $ 55.4 $ 68.6 $104.6
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of foreign currency swap contracts are $25.0 million in
1999, $11.6 million in 2000 and $18.8 million thereafter. There are no expected
maturities of foreign currency swap contracts in 1998, 2001 and 2002.

F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

F. INTEREST RATE SWAP CONTRACTS

The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. As with
foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by the nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1997 was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.

The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The (decrease) or increase
in net investment income related to interest rate swap contracts was $(0.4)
million, $0.6 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively. The fair values of interest rate swap contracts
outstanding were $(2.3) million at December 31, 1997. There were no interest
rate contracts outstanding at December 31, 1996. Changes in the fair value of
contracts are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Any gain or loss on the termination of interest rate
swap contracts accounted for as hedges are deferred and recognized with the gain
or loss on the hedged transaction. The Company had no deferred gain or loss on
interest rate swap contracts in 1997 or 1996.

A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 5.0 $ 17.5 $ 22.8
New contracts................................ 244.7 63.6 --
Contracts expired............................ (5.6) (17.5) (5.3)
------ ------ ------
Contracts outstanding, end of year........... $244.1 $ 63.6 $ 17.5
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of interest rate swap contracts outstanding at December 31,
1997 are as follows: $5.0 million in 1998, and $239.1 million in 2000 and
thereafter. There are no expected maturities of interest rate contracts in 1999.

G. OTHER SWAP CONTRACTS

The Company enters into security return-linked swap contracts and insurance
portfolio-linked swap contracts for investment purposes. Under the security
return-linked contracts, the Company agrees to exchange cash flows according to
the performance of a specified security or portfolio of securities. Under the
insurance portfolio-linked swap contracts, the Company agrees to exchange cash
flows according to the performance of a specified underwriter's portfolio of
insurance business. As with interest rate swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1997, were not material to the
Company. Swap contracts also subject the Company to market risk associated with
changes in interest rates. The Company does not require collateral or other
security to support financial instruments with credit risk.

F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The swap contracts are marked to market with any gain or loss recognized
currently. The net amount receivable or payable under these contracts is
recognized when the contracts are marked to market. The fair values of swap
contracts outstanding were $(0.1) million and $0.1 million at December 31, 1997
and 1996, respectively. The net decrease in realized investment gains related to
other swap contracts was $(1.6) million for the year ended December 31, 1997.
There were no realized investment gains on other swap contracts recognized in
1996 and 1995.

A reconciliation of the notional amount of other swap contracts is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Contracts outstanding, beginning of year..... $ 58.6 $ -- $ --
New contracts................................ 192.1 58.6 --
Contracts expired............................ (211.6) -- --
Contracts terminated......................... (24.1) -- --
------ ------ ------
Contracts outstanding, end of year........... $ 15.0 $ 58.6 $ --
------ ------ ------
------ ------ ------
</TABLE>

Expected maturities of other swap contracts outstanding at December 31, 1997 are
as follows: $10 million in 1999 and $5 million in 2001. There are no expected
maturities of such other swap contracts in 1998, 2000, or 2002.

H. OTHER

At December 31, 1997, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity, except for investments with the
U.S. Treasury with a carrying value of $262.5 million.

4. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Fixed maturities............................. $541.9 $553.8 $555.1
Mortgage loans............................... 57.5 69.5 97.0
Equity securities............................ 10.6 11.1 13.2
Policy loans................................. 10.9 10.3 20.3
Real estate.................................. 20.1 40.8 48.7
Other long-term investments.................. 12.4 19.9 7.5
Short-term investments....................... 12.8 10.6 21.2
------ ------ ------
Gross investment income...................... 666.2 716.0 763.0
Less investment expenses..................... (24.4) (45.2) (52.5)
------ ------ ------
Net investment income........................ $641.8 $670.8 $710.5
------ ------ ------
------ ------ ------
</TABLE>

At December 31, 1997, mortgage loans on non-accrual status were $3.6 million
which were all restructured loans. There were no fixed maturities which were on
non-accrual status at December 31, 1997. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, had no impact in 1997, and reduced net income by $0.5
million and $0.6 million in 1996 and 1995, respectively.

F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $40.3 million, $51.3 million and $98.9 million at December 31,
1997, 1996 and 1995, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $3.9 million, $7.7 million and $11.1 million in 1997,
1996 and 1995, respectively. Actual interest income on these loans included in
net investment income aggregated $4.2 million, $4.5 million and $7.1 million in
1997, 1996 and 1995, respectively.

There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.

Included in other long-term investments is income from limited partnerships of
$7.8 million, $13.7 million and $0.1 million in 1997, 1996 and 1995
respectively.

B. REALIZED INVESTMENT GAINS AND LOSSES

Realized gains (losses) on investments were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------- ------ ------ ------

<S> <C> <C> <C>
Fixed maturities............................. $ 14.7 $ (9.7) $ (7.0)
Mortgage loans............................... (1.2) (2.4) 1.4
Equity securities............................ 53.6 54.8 16.2
Real estate.................................. 12.8 21.1 5.3
Other........................................ (3.4) 3.0 3.2
------ ------ ------
Net realized investment gains................ $ 76.5 $ 66.8 $ 19.1
------ ------ ------
------ ------ ------
</TABLE>

5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality. Fair values of
interest rate futures were not material at December 31, 1997 and 1996.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

CASH AND CASH EQUIVALENTS

For these short-term investments, the carrying amount approximates fair value.

FIXED MATURITIES

Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.

F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

EQUITY SECURITIES

MORTGAGE LOANS

Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.

POLICY LOANS

The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.

REINSURANCE RECEIVABLES

The carrying amount reported in the consolidated balance sheets approximates
fair value.

INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)

Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.

DEBT

The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.

F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The estimated fair values of the financial instruments were as follows:

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
DECEMBER 31 CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- --------------------------------------------- --------- -------- --------- --------

<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 213.9 $ 213.9 $ 175.9 $ 175.9
Fixed maturities........................... 7,253.5 7,253.5 7,461.5 7,461.5
Equity securities.......................... 479.0 479.0 473.1 473.1
Mortgage loans............................. 567.5 597.0 650.1 675.7
Policy loans............................... 141.9 141.9 132.4 132.4
--------- -------- --------- --------
$ 8,655.8 $8,685.3 $ 8,893.0 $8,918.6
--------- -------- --------- --------
--------- -------- --------- --------

FINANCIAL LIABILITIES
Guaranteed investment contracts............ $ 985.2 $1,004.7 $ 1,101.3 $1,119.2
Supplemental contracts without life
contingencies............................ 22.4 22.4 23.1 23.1
Dividend accumulations..................... 87.8 87.8 87.3 87.3
Other individual contract deposit funds.... 57.9 55.7 76.9 74.3
Other group contract deposit funds......... 714.8 715.5 789.1 788.3
Individual annuity contracts............... 907.4 882.2 935.6 911.7
Short-term debt............................ 33.0 33.0 38.4 38.4
Long-term debt............................. 2.6 2.6 2.7 2.7
--------- -------- --------- --------
$ 2,811.1 $2,803.9 $ 3,054.4 $3,045.0
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>

6. CLOSED BLOCK

Included in other income in the Consolidated Statement of Income for 1997 and
1996 is a net pre-tax contribution from the Closed Block of $9.1 million and
$8.6 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1997 and 1996 and for the period ended December 31, 1997 and
1996 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $400.1 and $397.2, respectively).......... $ 412.9 $ 403.9
Mortgage loans............................................................................... 112.0 114.5
Policy loans................................................................................. 218.8 230.2
Cash and cash equivalents.................................................................... 25.1 24.1
Accrued investment income.................................................................... 14.1 14.3
Deferred policy acquisition costs............................................................ 18.2 21.1
Other assets................................................................................. 5.6 2.7
--------- ---------
Total assets............................................................................... $ 806.7 $ 810.8
--------- ---------
--------- ---------
Liabilities
Policy liabilities and accruals.............................................................. $ 875.1 $ 883.4
Other liabilities............................................................................ 10.4 16.0
--------- ---------
Total liabilities.......................................................................... $ 885.5 $ 899.4
--------- ---------
--------- ---------
</TABLE>

F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues
Premiums..................................................................................... $ 58.3 $ 61.7
Net investment income........................................................................ 53.4 52.6
Realized investment loss..................................................................... 1.3 (0.7)
--------- ---------
Total revenues................................................................................. 113.0 113.6
--------- ---------
Benefits and expenses
Policy benefits.............................................................................. 100.5 101.2
Policy acquisition expenses.................................................................. 3.0 3.2
Other operating expenses..................................................................... 0.4 0.6
--------- ---------
Total benefits and expenses.................................................................... 103.9 105.0
--------- ---------
Contribution from the Closed Block............................................................. $ 9.1 $ 8.6
--------- ---------
--------- ---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block......................................................... $ 9.1 $ 8.6
Initial cash transferred to the Closed Block............................................... -- --
Change in deferred policy acquisition costs, net........................................... 2.9 3.4
Change in premiums and other receivables................................................... -- 0.2
Change in policy liabilities and accruals.................................................. (11.6) (13.9)
Change in accrued investment income........................................................ 0.2 2.3
Deferred Taxes............................................................................. (5.1) 1.0
Change in other assets..................................................................... (2.9) (1.6)
Change in expenses and taxes payable....................................................... (2.0) 1.7
Other, net................................................................................. (1.2) 1.4
--------- ---------
Net cash (used in) provided by operating activities............................................ (10.6) 3.1
--------- ---------
Cash flows from investing activities:
Sales, maturities and repayments of investments............................................ 161.6 188.1
Purchases of investments................................................................... (161.4) (196.9)
Other, net................................................................................. 11.4 12.2
--------- ---------
Net cash provided by (used in) investing activities............................................ 11.6 3.4
--------- ---------
Net increase in cash and cash equivalents...................................................... 1.0 6.5
Cash and cash equivalents, beginning of year................................................... 24.1 17.6
--------- ---------
Cash and cash equivalents, end of year......................................................... $ 25.1 $ 24.1
--------- ---------
--------- ---------
</TABLE>

On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.

F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

7. DEBT

Short- and long-term debt consisted of the following:

FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.

At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.

During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.

In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.

Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.

8. FEDERAL INCOME TAXES

Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:

F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:

Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.

The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:

Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.

The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.

F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.

9. PENSION PLANS

FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.

Components of net pension expense were as follows:

F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The following table summarizes the combined status of the three pension plans.
At December 31, 1997 and 1996 the plans' assets exceeded their projected benefit
obligations.

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.................................................................... $ 332.6 $ 308.9
Unvested benefit obligation.................................................................. 7.5 6.6
--------- ---------
Accumulated benefit obligation................................................................. $ 340.1 $ 315.5
--------- ---------
--------- ---------

Pension liability included in Consolidated Balance Sheets:
Projected benefit obligation................................................................. $ 370.4 $ 344.2
Plan assets at fair value.................................................................... 395.5 347.8
--------- ---------
Plan assets greater (less) than projected benefit obligation............................... 25.1 3.6
Unrecognized net (gain) loss from past experience............................................ (44.9) (9.1)
Unrecognized prior service benefit........................................................... (13.9) (11.5)
Unamortized transition asset................................................................. (26.2) (24.7)
--------- ---------
Net pension liability.......................................................................... $ (59.9) $ (41.7)
--------- ---------
--------- ---------
</TABLE>

As a result of AFC's purchase of the minority shares of APY, certain pension
liabilities were reduced by $11.7 million to reflect their fair value as of the
purchase date.

Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1997 and 1996 and the assumed long-term rate of
return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.0% to 5.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. The
plans also hold stock of AFC.

The Company has three separate defined contribution 401(k) plans for its
employees. The Company matches employee elective 401(k) contributions, up to a
maximum percentage determined annually by the Board of Directors. During 1997
and 1996, the Company matched 50% of employees' contributions up to 6.0% of
eligible compensation. The total expenses related to these plans were $3.3
million and $5.5 million, in 1997 and 1996, respectively. In addition to these
plans, the Company has a defined contribution plan for substantially all of its
agents. The Plan expense in 1997 and 1996, was $2.8 million and $2.0 million,
respectively.

On January 1, 1998, substantially all of the aforementioned defined benefit and
defined contribution 401k plans were merged with the existing benefit plans of
FAFLIC. The transfer of benefit plans will not have a material impact on the
results of operations or financial position of the Company.

10. OTHER POSTRETIREMENT BENEFIT PLANS

In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover, and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.

F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.

The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:

The components of net periodic postretirement benefit expense were as follows:

As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.

For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.

The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.

As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.

F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

11. DIVIDEND RESTRICTIONS

Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.

Dividends from FAFLIC and APY (from Hanover) to AFC will be the primary source
of cash for repayment of the debt and capital securities by AFC and payment of
dividends to AFC stockholders.

Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. No dividends were declared nor paid
during 1997,1996 or 1995. During 1998, FAFLIC could pay dividends of $196.3
million to AFC without prior approval of the Commissioner. On January 12, 1998
FAFLIC declared a dividend of $50 million to AFC of which $18 million was paid
in February, 1998.

Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were paid by AFLIAC to FAFLIC during
1997, 1996 or 1995. During 1998, AFLIAC could pay dividends of $33.9 million to
FAFLIC without prior approval.

Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
Hanover declared dividends to Allmerica P&C totaling $120.0 million, 105.0
million and 40.0 million during 1997, 1996 and 1995, respectively. During 1998,
the maximum dividend and other distributions that could be paid to Allmerica P&C
by Hanover, without prior approval of the Insurance Commissioner, was
approximately $127.6 million.

Pursuant to Michigan's statute, the maximum dividends and other distributions
that an insurer may pay in any twelve month period, without prior approval of
the Michigan Insurance Commissioner, is limited to the greater of 10% of
policyholders' surplus as of December 31 of the immediately preceding year or
the statutory net income less realized gains, for the immediately preceding
calendar year. Citizens Insurance paid dividends to Citizens Corporation
totaling $6.3 million and $3.0 million during 1996 and 1995, respectively. No
dividends were paid by Citizens Insurance during 1997. During, 1998, Citizens
Insurance could pay dividends of $86.9 million to Citizens Corporation without
prior approval.

F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

12. SEGMENT INFORMATION

The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.

The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.

The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.

Summarized below is financial information with respect to business segments for
the year ended and as of December 31.

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty......................................... $ 2,275.3 $ 2,196.6 $ 2,109.0
Corporate Risk Management.............................................. 396.3 361.5 328.5
---------- ---------- ----------
Subtotal............................................................... 2,671.6 2,558.1 2,437.5
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 470.6 450.9 487.1
Institutional Services................................................. 243.4 270.7 330.2
Allmerica Asset Management............................................. 8.7 8.8 4.4
---------- ---------- ----------
Subtotal............................................................... 722.7 730.4 821.7
Eliminations............................................................. (10.1) (8.7) (4.4)
---------- ---------- ----------
Total...................................................................... $ 3,384.2 $ 3,279.8 $ 3,254.8
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------- ---------- ---------- ----------
Income from continuing operations before income taxes:
<S> <C> <C> <C>
Risk Management
Regional Property and Casualty......................................... $ 206.4 $ 197.7 $ 206.3
Corporate Risk Management.............................................. 19.3 20.7 18.3
---------- ---------- ----------
Subtotal............................................................... 225.7 218.4 224.6
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 87.4 76.9 35.2
Institutional Services................................................. 62.4 52.8 42.8
Allmerica Asset Management............................................. 1.4 1.1 2.3
---------- ---------- ----------
Subtotal............................................................... 151.2 130.8 80.3
---------- ---------- ----------
Total...................................................................... $ 376.9 $ 349.2 $ 304.9
---------- ---------- ----------
---------- ---------- ----------

Identifiable assets:
Risk Management
Regional Property and Casualty......................................... $ 5,710.4 $ 5,703.9 $ 5,741.8
Corporate Risk Management.............................................. 568.8 522.1 458.9
---------- ---------- ----------
Subtotal............................................................... 6,279.2 6,226.0 6,200.7
Retirement and Asset Accumulation
Allmerica Financial Services........................................... 12,049.6 8,822.4 7,218.6
Institutional Services................................................. 4,158.5 3,886.7 4,280.9
Allmerica Asset Management............................................. 4.1 2.4 2.1
---------- ---------- ----------
Subtotal............................................................... 16,212.2 12,711.5 11,501.6
---------- ---------- ----------
Total...................................................................... $ 22,491.4 $ 18,937.5 $ 17,702.3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

13. LEASE COMMITMENTS

Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $34.9 million and $36.4 million in 1997, 1996 and
1995, respectively. At December 31, 1997, future minimum rental payments under
non-cancelable operating leases were approximately $72.5 million, payable as
follows: 1998 -- $24.8 million; 1999 -- $19.8 million; 2000 -- $13.6 million;
2001 -- $7.9 million; and $6.4 million thereafter. It is expected that, in the
normal course of business, leases that expire will be renewed or replaced by
leases on other property and equipment; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts shown for 1998.

14. REINSURANCE

In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT DURATION AND LONG DURATION CONTRACTS.

Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also

F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

believes that the terms of its reinsurance contracts are consistent with
industry practice in that they contain standard terms with respect to lines of
business covered, limit and retention, arbitration and occurrence. Based on its
review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.

The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1997, CAR was the only reinsurer which
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company cedes a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1997, 1996 and 1995 were
$32.3 million and $28.2 million, $38.0 million and $21.8 million, and $49.1
million and $33.7 million, respectively.

The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1997, 1996 and 1995 of $9.8 million and $(0.8) million, $50.5
million and $(52.9) million, and $66.8 million and $62.9 million, respectively.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.

The effects of reinsurance were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct....................................................................... $ 417.4 $ 389.1 $ 438.9
Assumed...................................................................... 110.7 87.8 71.0
Ceded........................................................................ (170.1) (138.9) (150.3)
--------- --------- ---------
Net premiums................................................................... $ 358.0 $ 338.0 $ 359.6
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums written:
Direct....................................................................... $ 2,068.5 $ 2,039.7 $ 2,039.4
Assumed...................................................................... 103.1 108.7 125.0
Ceded........................................................................ (179.8) (234.0) (279.1)
--------- --------- ---------
Net premiums................................................................... $ 1,991.8 $ 1,914.4 $ 1,885.3
--------- --------- ---------
--------- --------- ---------
Property and casualty premiums earned:
Direct....................................................................... $ 2,046.2 $ 2,018.5 $ 2,021.7
Assumed...................................................................... 102.0 112.4 137.7
Ceded........................................................................ (195.1) (232.6) (296.2)
--------- --------- ---------
Net premiums................................................................... $ 1,953.1 $ 1,898.3 $ 1,863.2
--------- --------- ---------
--------- --------- ---------
Life insurance and other individual policy benefits, claims, losses and loss
adjustment expenses:
Direct....................................................................... $ 656.4 $ 606.5 $ 741.0
Assumed...................................................................... 61.6 44.9 38.5
Ceded........................................................................ (158.8) (77.8) (69.5)
--------- --------- ---------
Net policy benefits, claims, losses and loss adjustment expenses............... $ 559.2 $ 573.6 $ 710.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct....................................................................... $ 1,464.9 $ 1,299.8 $ 1,383.3
Assumed...................................................................... 101.2 85.8 146.1
Ceded........................................................................ (120.6) (2.2) (229.1)
--------- --------- ---------
Net policy benefits, claims, losses, and loss adjustment expenses.............. $ 1,445.5 $ 1,383.4 $ 1,300.3
--------- --------- ---------
--------- --------- ---------
</TABLE>

15. DEFERRED POLICY ACQUISITION COSTS

The following reflects changes to the deferred policy acquisition asset:

At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.

16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.

The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.

F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year.............................. $ 2,744.1 $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year............................. 1,564.1 1,513.3 1,427.3
Decrease in provision for insured events of prior years...................... (127.9) (141.4) (137.6)
--------- --------- ---------
Total incurred losses and LAE.................................................. 1,436.2 1,371.9 1,289.7
--------- --------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year................ 775.1 759.6 652.2
Losses and LAE attributable to insured events of prior years................. 732.1 627.6 614.3
--------- --------- ---------
Total payments................................................................. 1,507.2 1,387.2 1,266.5
--------- --------- ---------
Change in reinsurance recoverable on unpaid losses............................. (50.2) (136.6) 51.1
--------- --------- ---------
Other(1) (7.5) -- --
--------- --------- ---------
Reserve for losses and LAE, end of year........................................ $ 2,615.4 $ 2,744.1 $ 2,896.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

(1) Includes purchase accounting adjustments.

As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.

The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.

The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.

Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.

Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.

In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.

This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.

Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.

17. MINORITY INTEREST

The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

18. CONTINGENCIES

REGULATORY AND INDUSTRY DEVELOPMENTS

Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.

LITIGATION

In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.

On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.

The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.

RESIDUAL MARKETS

The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.

YEAR 2000

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.

19. STATUTORY FINANCIAL INFORMATION

The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:

<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Statutory net income (Combined)
Property and Casualty Companies.............................................. $ 190.3 $ 155.3 $ 155.3
Life and Health Companies.................................................... 191.2 133.3 134.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies.............................................. $ 1,279.8 $ 1,201.6 $ 1,128.4
Life and Health Companies.................................................... 1,221.3 1,120.1 965.6
</TABLE>

20. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)

In July 1997, a lawsuit on behalf of a punitive class was instituted in
Louisiana against AFC and certain of its subsidiaries by individual plaintiffs
alleging fraud, unfair or deceptive acts, breach of contract, misrepresentation,
and related claims in the sale of life insurance policies. In October 1997,
plaintiffs voluntarily dismissed the Louisiana suit and filed a substantially
similar action in Federal District Court in Worcester, Massachusetts. The
Company and the plaintiffs have entered into a settlement agreement. The Court
granted preliminary approval of the settlement on December 4, 1998, and has
scheduled the hearing to consider final approval for March 1999. Although the
Company believes it has meritorious defenses to plaintiffs' claims, it concluded
that this settlement was best for the Company. Accordingly, the Company
recognized a $31.0 million pre-tax expense during the third quarter of 1998
related to this litigation. Although the Company believes it has established an
appropriate reserve, this reserve may be revised based on changes in the
Company's estimate of the ultimate cost of the settlement.

F-37