GROUP VEL ACCT OF 1ST ALLMERICA FINANCIAL LIFE INS CO
485BPOS, 1998-10-15
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<PAGE>

                                                   Registration No.    333-06383
                                                                        811-7663
                                          
                                          
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
                                          
                                      FORM S-6
                                          
                FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
              SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
                                       N-8B-2

   
                           Post-Effective Amendment No. 5
                                          
                                  GROUP VEL ACCOUNT
                 OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                             (Exact Name of Registrant)
    
                                          
                  FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                 440 Lincoln Street
                                 Worcester MA 01653
                       (Address of Principal Executive Office)
                                          
                             Abigail M. Armstrong, Esq.
                                 440 Lincoln Street
                                 Worcester MA 01653
                 (Name and Address of Agent for Service of Process)
                                          
            It is proposed that this filing will become effective:
                                          

   
         X  immediately upon filing pursuant to paragraph (b)
       -----
             on ________ pursuant to paragraph (b)
       -----
            60 days after filing pursuant to paragraph (a) (1)
       -----
            on (date)  pursuant to paragraph (a) (1) of Rule 485
       -----
            this Post-Effective Amendment designates a new effective date
       -----for a previously filed post-effective amendment.
    


                            FLEXIBLE PREMIUM VARIABLE LIFE

Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The 24f-2 Notice
for the issuer's fiscal year ended December 31, 1997 was filed on or before
March 30, 1998.

<PAGE>


                         RECONCILIATION AND TIE BETWEEN ITEMS
                          IN FORM N-8b-2 AND THE PROSPECTUS
   
<TABLE>
<CAPTION>

ITEM NO. OF 
FORM N-8B-2                        CAPTION IN PROSPECTUS A
- -----------                        -----------------------
<S>                                <C>
1 . . . . . . . . . . . . . . . . .Cover Page
2 . . . . . . . . . . . . . . . . .Cover Page
3 . . . . . . . . . . . . . . . . .Not Applicable
4 . . . . . . . . . . . . . . . . .Distribution
5 . . . . . . . . . . . . . . . . .The Company, The Group VEL Account
6 . . . . . . . . . . . . . . . . .The Group VEL Account
7 . . . . . . . . . . . . . . . . .Not Applicable
8 . . . . . . . . . . . . . . . . .Not Applicable
9 . . . . . . . . . . . . . . . . .Legal Proceedings
10. . . . . . . . . . . . . . . . .Summary; Description of the Company, The Group VEL Account and 
                                   the Underlying Funds; The Certificate; Certificate Termination and 
                                   Reinstatement; Other Certificate Provisions
11. . . . . . . . . . . . . . . . .Summary;  The Trust, Investment Objectives and Policies 
12. . . . . . . . . . . . . . . . .Summary; The Trust; 
13. . . . . . . . . . . . . . . . .Summary; The Trust; VIP; VIP II; T. Rowe Price;  DGPF; and INVESCO
                                   VIF; Investment Advisory Services to the Trust; Investment Advisory
                                   Services to VIP; Investment Advisory Services to VIP II; Investment
                                   Advisory Services to T. Rowe Price; Investment Advisory Services to
                                   DGPF; Investment Advisory Services to INVESCO VIF; Charges and
                                   Deductions
14. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate
15. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate; Premium Payments;
                                   Allocation of Net Premiums 
16. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; VIP; VIP II; T. Rowe Price; DGPF; and
                                   INVESCO VIF; Premium Payments; Allocation of Net Premiums
17. . . . . . . . . . . . . . . . .Summary; Surrender; Partial Withdrawal; Charges and Deductions;
                                   Certificate Termination and Reinstatement
18. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; VIP; VIP II; T. Rowe Price; DGPF; and
                                   INVESCO VIF; Premium Payments Reports; Voting Rights 
20. . . . . . . . . . . . . . . . .Not Applicable
21. . . . . . . . . . . . . . . . .Summary; Certificate Loans; Other Certificate Provisions
22. . . . . . . . . . . . . . . . .Other Certificate Provisions
23. . . . . . . . . . . . . . . . .Not Required
24. . . . . . . . . . . . . . . . .Other Certificate Provisions
25. . . . . . . . . . . . . . . . .The Company
26. . . . . . . . . . . . . . . . .Not Applicable
27. . . . . . . . . . . . . . . . .The Company
28. . . . . . . . . . . . . . . . .Directors and Principal Officers of the Company
29. . . . . . . . . . . . . . . . .The Company
30. . . . . . . . . . . . . . . . .Not Applicable
31. . . . . . . . . . . . . . . . .Not Applicable 
32. . . . . . . . . . . . . . . . .Not Applicable
33. . . . . . . . . . . . . . . . .Not Applicable
34. . . . . . . . . . . . . . . . .Not Applicable

<PAGE>

35. . . . . . . . . . . . . . . . .Distribution
36. . . . . . . . . . . . . . . . .Not Applicable
37. . . . . . . . . . . . . . . . .Not Applicable
38. . . . . . . . . . . . . . . . .Summary; Distribution
39. . . . . . . . . . . . . . . . .Summary; Distribution
40. . . . . . . . . . . . . . . . .Not Applicable
41. . . . . . . . . . . . . . . . .The Company, Distribution
42. . . . . . . . . . . . . . . . .Not Applicable
43. . . . . . . . . . . . . . . . .Not Applicable
44. . . . . . . . . . . . . . . . .Premium Payments; Certificate Value and Surrender Value
45. . . . . . . . . . . . . . . . .Not Applicable
46. . . . . . . . . . . . . . . . .Certificate Value and Surrender Value; Federal Tax Considerations
47. . . . . . . . . . . . . . . . .The Company
48. . . . . . . . . . . . . . . . .Not Applicable
49. . . . . . . . . . . . . . . . .Not Applicable
50. . . . . . . . . . . . . . . . .The Group VEL Account
51. . . . . . . . . . . . . . . . .Cover Page; Summary; Charges and Deductions; The Certificate; 
                                   Certificate Termination and Reinstatement;  Other Certificate 
                                   Provisions
52. . . . . . . . . . . . . . . . .Addition, Deletion or Substitution of Investments
53. . . . . . . . . . . . . . . . .Federal Tax Considerations
54. . . . . . . . . . . . . . . . .Not Applicable
55. . . . . . . . . . . . . . . . .Not Applicable
56. . . . . . . . . . . . . . . . .Not Applicable
57. . . . . . . . . . . . . . . . .Not Applicable
58. . . . . . . . . . . . . . . . .Not Applicable
59. . . . . . . . . . . . . . . . .Not Applicable 
</TABLE>
    

<PAGE>

                        RECONCILIATION AND TIE BETWEEN ITEMS
                         IN FORM N-8b-2 AND THE PROSPECTUS
   
<TABLE>
<CAPTION>

ITEM NO. OF 
FORM N-8B-2                        CAPTION IN PROSPECTUS B
- -----------                        -----------------------
<S>                                <C>
1 . . . . . . . . . . . . . . . . .Cover Page
2 . . . . . . . . . . . . . . . . .Cover Page
3 . . . . . . . . . . . . . . . . .Not Applicable
4 . . . . . . . . . . . . . . . . .Distribution
5 . . . . . . . . . . . . . . . . .The Company, The Group VEL Account
6 . . . . . . . . . . . . . . . . .The Group VEL Account
7 . . . . . . . . . . . . . . . . .Not Applicable
8 . . . . . . . . . . . . . . . . .Not Applicable
9 . . . . . . . . . . . . . . . . .Legal Proceedings
10. . . . . . . . . . . . . . . . .Summary; Description of the Company, The Group VEL Account and the Underlying Funds; The
                                   Certificate; Certificate Termination and Reinstatement; Other Certificate Provisions
11. . . . . . . . . . . . . . . . .Summary; The Trust, Investment Objectives and Policies
12. . . . . . . . . . . . . . . . .Summary; The Trust; 
13. . . . . . . . . . . . . . . . .Summary; The Trust; VIP; VIP II; VIP III; T. Rowe Price; DGPF; INVESCO VIF; and MVAT; Investment
                                   Advisory Services to the Trust; Investment Advisory Services to VIP; Investment Advisory Services
                                   to VIP II; Investment Advisory Services to VIP III; Investment Advisory Services to T. Rowe
                                   Price; Investment Advisory Services to DGPF; Investment Advisory Services to INVESCO VIF; and
                                   Investment Advisory Services to MVAT; Charges and Deductions
14. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate
15. . . . . . . . . . . . . . . . .Summary; Enrollment Form for a Certificate; Premium Payments;
                                   Allocation of Net Premiums 
16. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; VIP; VIP II; VIP III, T. Rowe Price; DGPF; INVESCO VIF; and
                                   MVAT, Premium Payments; Allocation of Net Premiums
17. . . . . . . . . . . . . . . . .Summary; Surrender; Partial Withdrawal; Charges and Deductions;
                                   Certificate Termination and Reinstatement
18. . . . . . . . . . . . . . . . .The Group VEL Account; The Trust; VIP; VIP II; VIP III, T. Rowe Price; DGPF; INVESCO VIF; and
                                   MVAT, Premium Payments Reports; Voting Rights 
20. . . . . . . . . . . . . . . . .Not Applicable
21. . . . . . . . . . . . . . . . .Summary; Certificate Loans; Other Certificate Provisions
22. . . . . . . . . . . . . . . . .Other Certificate Provisions
23. . . . . . . . . . . . . . . . .Not Required
24. . . . . . . . . . . . . . . . .Other Certificate Provisions
25. . . . . . . . . . . . . . . . .The Company
26. . . . . . . . . . . . . . . . .Not Applicable
27. . . . . . . . . . . . . . . . .The Company
28. . . . . . . . . . . . . . . . .Directors and Principal Officers of the Company
29. . . . . . . . . . . . . . . . .The Company
30. . . . . . . . . . . . . . . . .Not Applicable
31. . . . . . . . . . . . . . . . .Not Applicable 
32. . . . . . . . . . . . . . . . .Not Applicable
33. . . . . . . . . . . . . . . . .Not Applicable
34. . . . . . . . . . . . . . . . .Not Applicable

<PAGE>

35. . . . . . . . . . . . . . . . .Distribution
36. . . . . . . . . . . . . . . . .Not Applicable
37. . . . . . . . . . . . . . . . .Not Applicable
38. . . . . . . . . . . . . . . . .Summary; Distribution
39. . . . . . . . . . . . . . . . .Summary; Distribution
40. . . . . . . . . . . . . . . . .Not Applicable
41. . . . . . . . . . . . . . . . .The Company, Distribution
42. . . . . . . . . . . . . . . . .Not Applicable
43. . . . . . . . . . . . . . . . .Not Applicable
44. . . . . . . . . . . . . . . . .Premium Payments; Certificate Value and Surrender Value
45. . . . . . . . . . . . . . . . .Not Applicable
46. . . . . . . . . . . . . . . . .Certificate Value and Surrender Value; Federal Tax Considerations
47. . . . . . . . . . . . . . . . .The Company
48. . . . . . . . . . . . . . . . .Not Applicable
49. . . . . . . . . . . . . . . . .Not Applicable
50. . . . . . . . . . . . . . . . .The Group VEL Account
51. . . . . . . . . . . . . . . . .Cover Page; Summary; Charges and Deductions; The Certificate;
                                   Certificate Termination and Reinstatement;  Other Certificate Provisions
52. . . . . . . . . . . . . . . . .Addition, Deletion or Substitution of Investments
53. . . . . . . . . . . . . . . . .Federal Tax Considerations
54. . . . . . . . . . . . . . . . .Not Applicable
55. . . . . . . . . . . . . . . . .Not Applicable
56. . . . . . . . . . . . . . . . .Not Applicable
57. . . . . . . . . . . . . . . . .Not Applicable
58. . . . . . . . . . . . . . . . .Not Applicable
59. . . . . . . . . . . . . . . . .Not Applicable 
</TABLE>
    
<PAGE>
                                          
                  FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                     SUPPLEMENT
                         TO PROSPECTUSES DATED MAY 1, 1998
                                          
                                          
    VEL II Account     Group VEL Account          Inheiritage Account (Variable)
                                          
                                          
The management fee table under the section Investment Advisory Services To The
Trust is amended to change the management fee structure for the Select Growth
Fund as follows:


                      First $250 Million. . . . . . 0.85%
                      Next $250 Million . . . . . . 0.80%
                      Next $250 Million . . . . . . 0.75%
                      Over $750 Million . . . . . . 0.70%

                                        * * * 

                         AMENDMENT TO DIRECTORS AND OFFICERS

Effective May 8, 1998, Robert P. Restrepo, Jr. has joined First Allmerica
Financial Life Insurance Company as a Director and Vice President.  Mr. Restrepo
most recently served as Chief Executive Officer, Personal Lines, for Travelers
Property & Casualty Group, Hartford, Connecticut from 1996 till May, 1998.  He
also previously served at Aetna Life & Casualty Company, Hartford, Connecticut
for over 25 years, most recently as Senior Vice President, Personal Lines,
1994-1996; Senior Vice President, Homeowner's Insurance, 1993-1994; and Vice
President, Sales 1991-1993.  Mr. Restrepo is also a Director of Allmerica
Financial Life Insurance and Annuity Company.

Dated:  June 1, 1998

<PAGE>

   
                                 FINANCIAL STATEMENTS

                   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 June 30,          Six Months Ended June 30,
 (In millions)                                                           1998             1997             1998              1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>             <C>                <C>
 REVENUES
 Premiums                                                            $   581.5         $   578.8       $  1,159.0         $ 1,141.1
 Universal life and investment product policy fees                        72.7              57.1            142.2             113.4
 Net investment income                                                   151.1             165.8            305.1             326.1
 Net realized investment gains                                            16.3              (1.6)            45.5              41.7
 Other income                                                             35.7              28.0             68.3              56.9
                                                                     ---------         ---------       ----------         ---------
   Total revenues                                                        857.3             828.1          1,720.1           1,679.2
                                                                     ---------         ---------       ----------         ---------

 BENEFITS, LOSSES AND EXPENSES
 Policy benefits, claims, losses and loss adjustment expenses            518.2             508.7          1,025.0           1,001.0
 Policy acquisition expenses                                             115.2             116.8            232.4             236.6
 Loss from cession of disability income business                             -                 -                -              53.9
 Other operating expenses                                                133.1             125.9            270.1             255.8
                                                                     ---------         ---------       ----------         ---------
   Total benefits, losses and expenses                                   766.5             751.4          1,527.5           1,547.3
                                                                     ---------         ---------       ----------         ---------
 Income before federal income taxes                                       90.8              76.7            192.6             131.9
                                                                     ---------         ---------       ----------         ---------

 FEDERAL INCOME TAX EXPENSE (BENEFIT)
   Current                                                                14.7              26.6             45.4              33.0
   Deferred                                                                5.8              (7.1)             0.2              (3.5)
                                                                     ---------         ---------       ----------         ---------
 Total federal income tax expense                                         20.5              19.5             45.6              29.5
                                                                     ---------         ---------       ----------         ---------

 Income before minority interest                                          70.3              57.2            147.0             102.4
 Minority interest                                                       (12.0)            (15.2)           (26.6)            (41.2)
                                                                     ---------         ---------       ----------         ---------

 Net income                                                               58.3              42.0            120.4              61.2

 OTHER COMPREHENSIVE INCOME (LOSS)
   Net appreciation on available for sale securities                      13.1             161.5             39.2              26.3
   (Provision) for deferred federal income taxes                          (4.6)            (56.5)           (13.7)             (9.2)
   Minority interest                                                      (3.4)            (33.1)           (11.6)             (6.8)
                                                                     ---------         ---------       ----------         ---------
       Other comprehensive income                                          5.1              71.9             13.9              10.3
                                                                     ---------         ---------       ----------         ---------

 Comprehensive income                                                $    63.4         $   113.9       $    134.3         $    71.5
                                                                     ---------         ---------       ----------         ---------
                                                                     ---------         ---------       ----------         ---------
</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)
                                                                                                           SIX MONTHS ENDED JUNE 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           392.4 
   Lost minority interest on capital transactions                                                             (9.6)              - 
                                                                                                         ---------      ----------
   Balance at end of period                                                                                  444.1           392.4 
                                                                                                         ---------      ----------

RETAINED EARNINGS
   Balance at beginning of period                                                                          1,567.4         1,367.4 
   Net income                                                                                                120.4            61.2 
   Dividends to shareholders                                                                                 (50.0)              - 
                                                                                                         ---------      ----------
   Balance at end of period                                                                                1,637.8         1,428.6 
                                                                                                         ---------      ----------

ACCUMULATED OTHER COMPREHENSIVE INCOME
  NET UNREALIZED APPRECIATION ON INVESTMENTS
   Balance at beginning of period                                                                            209.3           131.4 
   Net appreciation on available for sale securities                                                          39.2            26.3 
   (Provision) for deferred federal income taxes                                                             (13.7)           (9.2)
   Minority interest                                                                                         (11.6)           (6.8) 
                                                                                                         ---------      ----------
       Other comprehensive income                                                                             13.9            10.3 
                                                                                                         ---------      ----------
   Balance at end of period                                                                                  223.2           141.7 
                                                                                                         ---------      ----------

      Total shareholder's equity                                                                         $ 2,310.1      $  1,967.7 
                                                                                                         ---------      ----------
                                                                                                         ---------      ----------
</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)
                                                                                                       JUNE 30,       DECEMBER 31,
(In millions)                                                                                              1998             1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>                <C>
ASSETS
   Investments:
      Fixed maturities at fair value (amortized cost of $7,405.7 and $6,992.8)                      $     7,653.9      $    7,253.5 
      Equity securities at fair value (cost of $386.4 and $341.1)                                           574.0             479.0 
      Mortgage loans                                                                                        555.2             567.5 
      Real estate                                                                                            27.1              50.3 
      Policy loans                                                                                          150.4             141.9 
      Other long term investments                                                                           154.3             148.3 
                                                                                                    -------------      ------------
         Total investments                                                                                9,114.9           8,640.5 
                                                                                                    -------------      ------------
   Cash and cash equivalents                                                                                179.9             213.9 
   Accrued investment income                                                                                143.7             141.8 
   Deferred policy acquisition costs                                                                      1,052.7             965.5 
   Reinsurance receivables:
      Future policy benefits                                                                                327.9             307.1 
      Outstanding claims, losses and loss adjustment expenses                                               628.5             626.7 
      Unearned premiums                                                                                      39.3              32.9 
      Other                                                                                                 107.8              73.6 
                                                                                                    -------------      ------------
        Total reinsurance receivables                                                                     1,103.5           1,040.3 
                                                                                                    -------------      ------------
   Premiums, accounts and notes receivable                                                                  579.9             554.4 
   Other assets                                                                                             381.8             372.9 
   Closed block assets                                                                                      796.4             806.7 
   Separate account assets                                                                               12,260.5           9,755.4 
                                                                                                    -------------      ------------
         Total assets                                                                               $    25,613.3      $   22,491.4 
                                                                                                    -------------      ------------
                                                                                                    -------------      ------------

LIABILITIES
   Policy liabilities and accruals:
      Future policy benefits                                                                        $     2,622.7      $    2,598.6 
      Outstanding claims, losses and loss adjustment expenses                                             2,831.3           2,825.0 
      Unearned premiums                                                                                     854.8             846.8 
      Contractholder deposit funds and other policy liabilities                                           2,436.3           1,852.7 
                                                                                                    -------------      ------------
         Total policy liabilities and accruals                                                            8,745.1           8,123.1 
                                                                                                    -------------      ------------
   Expenses and taxes payable                                                                               624.0             662.6 
   Dividends payable to shareholders                                                                         30.0                 - 
   Reinsurance premiums payable                                                                              58.5              37.7 
   Short term debt                                                                                           10.0              33.0 
   Deferred federal income taxes                                                                             27.5              12.9 
   Long term debt                                                                                               -               2.6 
   Closed block liabilities                                                                                 871.4             885.5 
   Separate account liabilities                                                                          12,255.9           9,749.7 
                                                                                                    -------------      ------------
      Total liabilities                                                                                  22,622.4          19,507.1 
                                                                                                    -------------      ------------
      Minority interest                                                                                     680.8             748.9 
      Committments 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                                                                   223.2             209.3 
   Retained earnings                                                                                      1,637.8           1,567.4 
                                                                                                    -------------      ------------
      Total shareholder's equity                                                                          2,310.1           2,235.4 
                                                                                                    -------------      ------------
      Total liabilities and shareholder's equity                                                    $    25,613.3      $   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)
                                                                                                        SIX MONTHS ENDED
                                                                                                   JUNE 30,            JUNE 30,
(In millions)                                                                                        1998                1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                                  $    120.4            $    61.2
   Adjustments to reconcile net income to net cash provided by (used in) operating
   activities:
      Minority interest                                                                              26.6                 41.2
      Net realized (gains)                                                                          (47.2)               (42.7)
      Net amortization and depreciation                                                              14.6                 13.7
      Deferred federal income taxes                                                                   0.2                 (3.5)
      Change in deferred acquisition costs                                                          (86.8)               (63.9)
      Change in premiums and notes receivable, net of reinsurance                                    (3.9)                 2.9
      Change in accrued investment income                                                            (1.8)                 0.3
      Change in policy liabilities and accruals, net                                                 23.7                (71.1)
      Change in reinsurance receivable                                                              (63.3)                20.3
      Change in expenses and taxes payable                                                          (32.4)               (47.5)
      Separate account activity, net                                                                  1.1                  0.3
      Loss from cession of disability income business                                                   -                 53.9
      Other, net                                                                                      4.2                  5.4
                                                                                               ----------            ---------
         Net cash (used in) provided by operating activities                                        (44.6)               (29.5)
                                                                                               ----------            ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from disposals and maturities of available-for-sale fixed maturities                  1,240.3              1,468.1
   Proceeds from disposals of equity securities                                                      61.1                121.0
   Proceeds from disposals of other investments                                                      49.9                 43.0
   Proceeds from mortgages matured or collected                                                      92.2                107.9
   Purchase of available-for-sale fixed maturities                                               (1,648.5)            (1,364.2)
   Purchase of equity securities                                                                    (90.6)               (22.0)
   Purchase of other investments                                                                   (118.5)               (70.6)
   Capital expenditures                                                                              (3.3)                (2.8)
   Other investing activities                                                                        (3.9)                 0.5
                                                                                               ----------            ---------
      Net cash (used in) provided by investing activities                                          (421.3)               280.9
                                                                                               ----------            ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Deposits and interest credited to contractholder deposit funds                                   844.9                125.4
   Withdrawals from contractholder deposit funds                                                   (259.4)              (302.1)
   Change in short term debt                                                                        (23.0)                (4.0)
   Change in long term debt                                                                          (2.6)                   -
   Dividends paid to shareholders                                                                   (20.0)                (2.4)
   Purchase of Minority Interest                                                                   (125.0)                   -
                                                                                               ----------            ---------
      Net cash provided by (used in) financing activities                                           414.9               (183.1)
                                                                                               ----------            ---------
Net change in cash and cash equivalents                                                             (51.0)                68.3
Net change in cash held in the Closed Block                                                          17.0                  5.9
Cash and cash equivalents, beginning of period                                                      213.9                175.9
                                                                                               ----------            ---------
Cash and cash equivalents, end of period                                                       $    179.9            $   250.1
                                                                                               ----------            ---------
                                                                                               ----------            ---------
</TABLE>

              The accompanying notes are an integral part of these
                    consolidated financial statements.

    


                                         UF-4
<PAGE>

   
                   FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                  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 June 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 second quarter and six month
period ended June 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 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.

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 second quarter and six months
ended June 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 No. 98-1"). SOP No. 98-1 requires
that certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use.  This statement is effective for fiscal years
beginning after December 15, 1998.  In the second quarter, the Company adopted
SOP No. 98-1 effective January 1, 1998, resulting an increase in pre-tax income
of $6.2 million.  The adoption of SOP No. 98-1 had no material effect on the
results of operations or financial position for the three months ended March 31,
1998.

In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SOP 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.
    


                                         UF-5
<PAGE>

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

In 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 has 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.

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.

5. Federal Income Taxes

Federal income tax expense for the periods ended June 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.
    


                                         UF-6
<PAGE>

   
6. Closed Block

Included in other income in the Consolidated Statements of Income is a net
pre-tax contribution from the Closed Block of $3.6 million and $6.0 million for
the second quarter and six months ended June 30, 1998 respectively, compared to
$0.5 million and $6.0 million for the second quarter and six months ended June
30, 1997, respectively.  Summarized financial information of the Closed Block is
as follows:

<TABLE>
<CAPTION>
                                                                            (UNAUDITED)
 (In millions)                                                                 JUNE 30,    DECEMBER 31,
                                                                                 1998           1997
- -------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>
  ASSETS
    Fixed maturities-at fair value (amortized cost of $403.0 and $400.1)    $    416.0   $    412.9 
    Mortgage loans                                                               124.9        112.0 
    Policy loans                                                                 214.1        218.8 
    Cash and cash equivalents                                                      8.1         25.1 
    Accrued investment income                                                     14.1         14.1 
    Deferred policy acquisition costs                                             16.5         18.2 
    Other assets                                                                   2.7          5.6 
                                                                            ----------    ---------
          Total assets                                                      $    796.4    $   806.7
                                                                            ----------    ---------
                                                                            ----------    ---------
 LIABILITIES
    Policy liabilities and accruals                                         $    861.3    $   875.1
    Other liabilities                                                             10.1         10.4 
                                                                            ----------    ---------
          Total liabilities                                                 $    871.4    $   885.5 
                                                                            ----------    ---------
                                                                            ----------    ---------

<CAPTION>

                                                                                   (UNAUDITED)                  (UNAUDITED)
                                                                                     QUARTER                    SIX MONTHS 
                                                                                      ENDED                        ENDED
                                                                                     JUNE 30,                     JUNE 30,
                                                                            -----------------------      ---------------------------
 (In millions)                                                                   1998          1997           1998           1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>           <C>            <C>            <C>
 REVENUES
    Premiums                                                                $      9.0    $     9.7      $    37.2      $    39.0
    Net investment income                                                         13.2         13.2           26.4           26.7
    Net realized investment gains                                                  1.6          0.1            1.6            1.0
                                                                            ----------    ---------      ---------      ---------
       Total revenues                                                             23.8         23.0           65.2           66.7
                                                                            ----------    ---------      ---------      ---------

 BENEFITS AND EXPENSES
    Policy benefits                                                               19.7         21.8           57.4           59.1
    Policy acquisition expenses                                                    0.6          0.5            1.3            1.4
    Other operating expenses                                                      (0.1)         0.2            0.5            0.2
                                                                            ----------    ---------      ---------      ---------
       Total benefits and expenses                                                20.2         22.5           59.2           60.7
                                                                            ----------    ---------      ---------      ---------

          Contribution from the Closed Block                                $      3.6    $     0.5      $     6.0      $     6.0
                                                                            ----------    ---------      ---------      ---------
                                                                            ----------    ---------      ---------      ---------
</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.
    


                                         UF-7
<PAGE>

   
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.  

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. 

    


                                         UF-8
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                          (Unaudited)                         (Unaudited)
                                                                         Quarter Ended                     Six Months Ended
                                                                             June 30,                          June 30,
   (In millions)                                                   1998                1997                1998              1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                 <C>               <C>
 Segment revenues
       Risk Management
           Property and Casualty                              $      555.9       $       553.1       $     1,109.4     $   1,089.0 
           Corporate Risk Management Services                        102.8               102.9               207.8           198.7 
                                                              ------------       -------------       -------------     -----------
                Subtotal                                             658.7               656.0             1,317.2         1,287.7 
                                                              ------------       -------------       -------------     -----------
        Retirement and Asset Accumulation
            Allmerica Financial Services                             172.4               175.0               363.6           366.2 
            Allmerica Asset Management                                29.9                23.6                53.8            47.5 
                                                              ------------       -------------       -------------     -----------
                 Subtotal                                            202.3               198.6               417.4           413.7 
                                                              ------------       -------------       -------------     -----------
        Corporate                                                      5.2                  .9                 6.2             1.9 
        Intersegment revenues                                         (2.0)               (3.5)               (4.1)           (6.0)
                                                              ------------       -------------       -------------     -----------
            Total segment revenues including Closed Block            864.2               852.0             1,736.7         1,697.3 
                 Adjustment for Closed Block                         (18.7)              (22.2)              (57.6)          (59.7)
                 Net realized gains (losses)                          11.8                (1.7)               41.0            41.6 
                                                              ------------       -------------       -------------     -----------

            Total revenues                                    $      857.3       $       828.1       $     1,720.1     $   1,679.2 
                                                              ------------       -------------       -------------     -----------
                                                              ------------       -------------       -------------     -----------

 Segment income (loss) before income taxes and minority
 interest:
        Risk Management
            Property and Casualty                             $       36.8       $        45.4       $        74.5     $      83.1 
            Corporate Risk Management Services                         1.4                 6.5                 6.6             9.9 
                                                              ------------       -------------       -------------     -----------
                 Subtotal                                             38.2                51.9                81.1            93.0 
                                                              ------------       -------------       -------------     -----------
         Retirement and Asset Accumulation
             Allmerica Financial Services                             43.6                32.0                85.3            61.8 
             Allmerica Asset Management                                6.2                 5.4                10.1             8.6 
                                                              ------------       -------------       -------------     -----------
                  Subtotal                                            49.8                37.4                95.4            70.4 
                                                              ------------       -------------       -------------     -----------
          Corporate                                                  (13.8)               (7.4)              (23.7)          (17.3)
                                                              ------------       -------------       -------------     -----------
              Segment income before income taxes and          
             minority interest                                        74.2                81.9               152.8           146.1 
 Adjustments to segment income:
          Net realized investment gains, net of amortization          16.7                (1.8)               40.6            42.2 
          Loss on cession of disability income business                  -                   -                   -           (53.9)
          Other items                                                  (.1)               (3.3)                (.8)           (2.5)
                                                              ------------       -------------       -------------     -----------
 Income before taxes and minority interest                    $       90.8       $        76.8       $       192.6     $     131.9 
                                                              ------------       -------------       -------------     -----------
                                                              ------------       -------------       -------------     -----------
</TABLE>
    


                                         UF-9
<PAGE>

   
<TABLE>
<CAPTION>
                                                             IDENTIFIABLE ASSETS                   DEFERRED ACQUISITION COSTS
- ------------------------------------------------------------------------------------------------------------------------------------
                                                     (UNAUDITED)                               (UNAUDITED) 
                                                       JUNE 30,            DECEMBER 31,          JUNE 30,          DECEMBER 31,
  (In millions)                                          1998                  1997                1998                1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                 <C>                     <C>                 <C>
  Risk Management
    Property and Casualty. . . . . . . . . . . .   $    5,538.8        $      5,650.4          $     163.5            $    167.2
    Corporate Risk Management Services . . . . .          635.8                 619.8                  2.9                   2.9
       Subtotal  . . . . . . . . . . . . . . . .        6,174.6               6,270.2                166.4                 170.1
                                                   ------------        --------------          -----------            ----------
  Retirement and Asset Accumulation
    Allmerica Financial Services . . . . . . . .       17,743.3              15,159.2                885.5                 794.5
    Allmerica Asset Management . . . . . . . . .        1,651.3               1,035.1                   .8                   0.9
                                                   ------------        --------------          -----------            ----------
       Subtotal  . . . . . . . . . . . . . . . .       19,394.6              16,194.3                886.3                 795.4
  Corporate. . . . . . . . . . . . . . . . . . .           44.1                  26.9                    -                     -
                                                   ------------        --------------          -----------            ----------
    Total. . . . . . . . . . . . . . . . . . . .   $   25,613.3        $     22,491.4          $   1,052.7            $    965.5
                                                   ------------        --------------          -----------            ----------
</TABLE>

8. Commitments and Contingencies

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.

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-10
<PAGE>

   
                                    BALANCE SHEET


                                  GROUP VEL ACCOUNT
     
                         STATEMENTS OF ASSETS AND LIABILITIES
                                     (UNAUDITED)
                                 SEPTEMBER 30, 1998
     
<TABLE>
<CAPTION>
                                                                                 INVESTMENT                                     
                                                                                    GRADE      MONEY        EQUITY     GOVERNMENT
                                                                       GROWTH      INCOME      MARKET       INDEX          BOND  
                                                                    ---------    ---------    ---------    ---------    ---------
<S>                                                                 <C>          <C>          <C>          <C>          <C>
ASSETS :                                                             
Investments in shares of Allmerica Investment Trust  . . . . . . .  $     353    $     271    $     239    $     415    $     258
Investments in shares of Fidelity Variable Insurance
  Products Funds . . . . . . . . . . . . . . . . . . . . . . . . .          -            -            -            -            -
Investment in shares of T. Rowe Price International
  Series, Inc.   . . . . . . . . . . . . . . . . . . . . . . . . .          -            -            -            -            -
Investment in shares of Delaware Group Premium Fund, Inc.  . . . .          -            -            -            -            -
Investments in shares of INVESCO Variable Investment Funds, Inc. .          -            -            -            -            -
                                                                    ---------    ---------    ---------    ---------    ---------
  Total  assets  . . . . . . . . . . . . . . . . . . . . . . . . .        353          271          239          415          258

LIABILITIES:                                                                -            -            -            -            -
                                                                    ---------    ---------    ---------    ---------    ---------
  Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . .  $     353    $     271    $     239    $     415    $     258
                                                                    ---------    ---------    ---------    ---------    ---------
                                                                    ---------    ---------    ---------    ---------    ---------

Net asset distribution by category:          
  Variable life policies   . . . . . . . . . . . . . . . . . . . .  $       -    $       -    $       -    $       -    $       -
  Value of investments by First Allmerica Financial Life Insurance 
    Company (Sponsor)  . . . . . . . . . . . . . . . . . . . . . .        353          271          239          415          258
                                                                    ---------    ---------    ---------    ---------    ---------
                                                                    $     353    $     271    $     239    $     415    $     258
                                                                    ---------    ---------    ---------    ---------    ---------
                                                                    ---------    ---------    ---------    ---------    ---------

Units outstanding . . . . . . . . . . . . . . . . . . . . . . . . .       200          200          200          200          200
Net asset value per unit . . . . . . . . . . . . . . .  . . . . . . $1.766571    $1.353405    $1.195309    $2.072812    $1.289701

<CAPTION>

                                                                      SELECT                  SELECT     SELECT         SELECT
                                                                    AGGRESSIVE    SELECT      GROWTH      VALUE     INTERNATIONAL
                                                                      GROWTH      GROWTH    AND INCOME   OPPORTUNITY*    EQUITY 
                                                                    -----------  ---------  ----------   ----------- ------------
<S>                                                                  <C>         <C>        <C>          <C>         <C>     
ASSETS :                                                                                                                  
Investments in shares of Allmerica Investment Trust  . . . . . . .   $     315  $     418    $     350   $      328    $     281
Investments in shares of Fidelity Variable Insurance
  Products Funds . . . . . . . . . . . . . . . . . . . . . . . . .           -          -            -            -            -
Investment in shares of T. Rowe Price International
  Series, Inc.   . . . . . . . . . . . . . . . . . . . . . . . . .           -          -            -            -            -
Investment in shares of Delaware Group Premium Fund, Inc.  . . . .           -          -            -            -            -
Investments in shares of INVESCO Variable Investment Funds, Inc. .           -          -            -            -            -
                                                                     ---------  ---------    ---------    ---------    ---------
  Total  assets  . . . . . . . . . . . . . . . . . . . . . . . . .         315        418          350          328          281

LIABILITIES:                                                                 -          -            -            -            -
                                                                     ---------  ---------    ---------    ---------    ---------
  Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . .   $     315  $     418    $     350    $     328    $     281
                                                                     ---------  ---------    ---------    ---------    ---------
                                                                     ---------  ---------    ---------    ---------    ---------

Net asset distribution by category:                                                                                      
  Variable life policies   . . . . . . . . . . . . . . . . . . . .   $       -  $       -    $       -    $       -    $       -
  Value of investments by First Allmerica Financial Life Insurance                                                       
    Company (Sponsor)  . . . . . . . . . . . . . . . . . . . . . .         315        418          350          328          281
                                                                     ---------  ---------    ---------    ---------    ---------
                                                                     $     315  $     418    $     350    $     328    $     281
                                                                     ---------  ---------    ---------    ---------    ---------
                                                                     ---------  ---------    ---------    ---------    ---------

Units outstanding . . . . . . . . . . . . . . . . . . . . . . . . .        200        200          200          200          200
Net asset value per unit . . . . . . . . . . . . . . .  . . . . . .  $1.573938  $2.089739    $1.748209    $1.640789    $1.406327
</TABLE>


*  Name changed.  See Note 1.      

   The accompanying notes are an integral part of these financial statements.
    


                                     SA-1
<PAGE>

   

                                 BALANCE SHEET


                               GROUP VEL ACCOUNT

               STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
                                  (UNAUDITED)
                               SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                              SELECT         FIDELITY       FIDELITY        FIDELITY      FIDELITY
                                                              CAPITAL           VIP            VIP            VIP           VIP
                                                            APPRECIATION    HIGH INCOME   EQUITY-INCOME      GROWTH       OVERSEAS
                                                           -------------   -------------  -------------   ------------  ------------
<S>                                                        <C>             <C>            <C>             <C>           <C>
ASSETS:
Investments in shares of Allmerica  Investment Trust. .    $         308   $           -  $           -   $          -  $          -
Investments in shares of Fidelity Variable Insurance
  Products Funds. . . . . . . . . . . . . . . . . . . .                -             272            340            396           259
Investment in shares of T. Rowe Price International
  Series, Inc.. . . . . . . . . . . . . . . . . . . . .                -               -              -              -             -
Investment in shares of Delaware Group Premium  
  Fund, Inc.. . . . . . . . . . . . . . . . . . . . . .                -               -              -              -             -
Investments in shares of INVESCO Variable Investment 
  Funds, Inc. . . . . . . . . . . . . . . . . . . . . .                -               -              -              -             -
                                                           -------------   -------------  -------------   ------------  ------------
   Total assets . . . . . . . . . . . . . . . . . . . .              308             272            340            396           259

LIABILITIES:                                                           -               -              -              -             -
                                                          --------------   -------------  -------------   ------------  ------------
   Net assets . . . . . . . . . . . . . . . . . . . . .   $          308   $         272  $         340   $        396  $        259
                                                          --------------   -------------  -------------   ------------  ------------
                                                          --------------   -------------  -------------   ------------  ------------


Net asset distribution by category:
    Variable life policies. . . . . . . . . . . . . . .   $            -   $           -  $           -   $          -  $          -
    Value of investments by First Allmerica Financial
      Life Insurance Company (Sponsor). . . . . . . . .              308             272            340            396           259
                                                          --------------   -------------  -------------   ------------  ------------
                                                          $          308   $         272  $         340   $        396  $        259
                                                          --------------   -------------  -------------   ------------  ------------
                                                          --------------   -------------  -------------   ------------  ------------

    Units outstanding . . . . . . . . . . . . . . . . .              200             200            200            200           200

    Net asset value per unit. . . . . . . . . . . . . .       $ 1.541959      $ 1.357594     $ 1.701626     $ 1.980787    $ 1.296389

<CAPTION>

                                                              FIDELITY     T. ROWE PRICE      DGPF          INVESCO       INVESCO
                                                               VIP II      INTERNATIONAL  INTERNATIONAL    INDUSTRIAL      TOTAL
                                                           ASSET MANAGER     STOCK (a)       EQUITY        INCOME (a)    RETURN (a)
                                                          ---------------  -------------  -------------   ------------  ------------
<S>                                                       <C>              <C>            <C>             <C>           <C>
ASSETS:
Investments in shares of Allmerica  Investment Trust. .   $             -  $           -  $           -   $          -  $          -
Investments in shares of Fidelity Variable Insurance
  Products Funds. . . . . . . . . . . . . . . . . . . .               317              -              -              -             -
Investment in shares of T. Rowe Price International     
  Series, Inc.. . . . . . . . . . . . . . . . . . . . .                 -              -              -              -             -
Investment in shares of Delaware Group Premium          
  Fund, Inc.. . . . . . . . . . . . . . . . . . . . . .                 -              -            268              -             -
Investments in shares of INVESCO Variable Investment    
  Funds, Inc. . . . . . . . . . . . . . . . . . . . . .                 -              -              -              -             -
                                                          ---------------  -------------  -------------   ------------  ------------
   Total assets . . . . . . . . . . . . . . . . . . . .               317  $           -  $         268   $          -  $          -

LIABILITIES:                                                            -              -              -              -             -

   Net assets . . . . . . . . . . . . . . . . . . . . .   $           317  $           -  $         268   $          -  $          -
                                                          ---------------  -------------  -------------   ------------  ------------
                                                          ---------------  -------------  -------------   ------------  ------------

Net asset distribution by category:                     
    Variable life policies. . . . . . . . . . . . . . .   $             -  $           -  $           -   $          -  $          -
    Value of investments by First Allmerica Financial
      Life Insurance Company (Sponsor). . . . . . . . .               317              -            268              -             -
                                                          ---------------  -------------  -------------   ------------  ------------
                                                          $           317  $           -  $         268   $          -  $          -
                                                          ---------------  -------------  -------------   ------------  ------------
                                                          ---------------  -------------  -------------   ------------  ------------

    Units outstanding . . . . . . . . . . . . . . . . .               200              0            200              0             0

    Net asset value per unit. . . . . . . . . . . . . .        $ 1.586257     $ 1.000000     $ 1.342082     $ 1.000000    $ 1.000000
</TABLE>


(a) For the period ended September 30, 1998, there were no transactions.

  The accompanying notes are an integral part of these financial statements.
    


                                     SA-2
<PAGE>>

   
                                    OPS

                             GROUP VEL ACCOUNT

                         STATEMENTS OF OPERATIONS
                                (UNAUDITED)
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998


<TABLE>
<CAPTION>
                                                                            INVESTMENT                                            
                                                                              GRADE       MONEY       EQUITY      GOVERNMENT  
                                                                   GROWTH     INCOME      MARKET      INDEX           BOND       
                                                                   ------   ----------   -------   ---------      ----------
<S>                                                              <C>        <C>          <C>       <C>          <C>
INVESTMENT INCOME:
  Dividends  . . . . . . . . . . . . . . . . . . . . . .         $        3  $      12   $      9  $       4    $        10  


EXPENSES:
  Mortality and expense risk fees  . . . . . . . . . . .                  -           -         -           -             -
  Administrative expense fees    . . . . . . . . . . . .                  -           -         -           -             -
                                                                 ----------  ----------  --------  ----------   -----------
    Total expenses . . . . . . . . . . . . . . . . . . .                  -           -         -           -             -
                                                                 ----------  ----------  --------  ----------   -----------

  Net investment income  . . . . . . . . . . . . . . . .                  3          12         9           4            10
                                                                 ----------  ----------  --------  ----------   -----------


REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
  Realized gain distributions from portfolio sponsors. .                  4           -         -           1             -
  Net realized gain from sales of investments  . . . . .                  -           -         -           -             -
                                                                 ----------  ----------  --------  ----------   -----------
    Net realized gain . . . . . . . . . . . . .  . . . .                  4           -         -           1             -
  Net unrealized gain (loss) . . . . . . . . . . . . . .                (14)          8         -          18             8
                                                                 ----------  ----------  --------  ----------   -----------

    Net realized and unrealized  gain (loss) . . . . . .                (10)          8         -          19             8
                                                                 ----------  ----------  --------  ----------   -----------
    Net increase (decrease) in net assets from 
      operations . . . . . . . . . . . . . . . . . . . .         $       (7) $       20  $      9  $       23   $        18  
                                                                 ----------  ----------  --------  ----------   -----------
                                                                 ----------  ----------  --------  ----------   -----------


<CAPTION>
                                                                   SELECT                 SELECT        SELECT         SELECT
                                                                 AGGRESSIVE   SELECT      GROWTH        VALUE       INTERNATIONAL 
                                                                  GROWTH      GROWTH    AND INCOME  OPPORTUNITY*      EQUITY   
                                                                 ----------  ---------- ----------  ------------    -------------
<S>                                                              <C>         <C>        <C>         <C>             <C>
INVESTMENT INCOME:                                                                                                                
  Dividends  . . . . . . . . . . . . . . . . . . . . . .         $        -  $        0 $        3  $          0    $           2 
                                                                                                                                   
                                                                                                                                   
EXPENSES:                                                                                                                          
  Mortality and expense risk fees  . . . . . . . . . . .                  -           -          -             -                -  
  Administrative expense fees    . . . . . . . . . . . .                  -           -          -             -                -  
                                                                 ----------  ---------- ----------  ------------    -------------
    Total expenses . . . . . . . . . . . . . . . . . . .                  -           -          -             -                -  
                                                                 ----------  ---------- ----------  ------------    -------------
                                                                 
  Net investment income  . . . . . . . . . . . . . . . .                  -           0          3             0                2
                                                                 ----------  ---------- ----------  ------------    -------------

                                                                                                                                 
                                                                          
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                      
  Realized gain distributions from portfolio sponsors. .                  -           4          1             1                -
  Net realized gain from sales of investments  . . . . .                  -           -          -             -                -
                                                                 ----------  ---------- ----------  ------------    -------------
    Net realized gain . . . . . . . . . . . . .  . . . .                  -           4          1             1                -
  Net unrealized gain (loss) . . . . . . . . . . . . . .                (36)         28        (14)          (28)             (10)
                                                                 ----------  ---------- ----------  ------------    -------------

    Net realized and unrealized  gain (loss) . . . . . .                (36)         32        (12)          (27)             (10)
                                                                 ----------  ---------- ----------  ------------    -------------
    Net increase (decrease) in net assets from          
      operations . . . . . . . . . . . . . . . . . . . .         $      (36) $       32 $       (9) $        (27)   $          (8)
                                                                 ----------  ---------- ----------  ------------    -------------
                                                                 ----------  ---------- ----------  ------------    -------------
</TABLE>


*  Name changed.  See Note 1.

  The accompanying notes are an integral part of these financial statements.
    


                                       SA-3
<PAGE>

   
                                     OPS


                              GROUP VEL ACCOUNT

                     STATEMENTS OF OPERATIONS (CONTINUED)
                                (UNAUDITED)
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998


<TABLE>
<CAPTION>
                                                                   SELECT      FIDELITY      FIDELITY     FIDELITY    FIDELITY
                                                                  CAPITAL         VIP          VIP          VIP         VIP   
                                                                 APPRECIATION HIGH INCOME  EQUITY-INCOME  GROWTH      OVERSEAS
                                                                 ------------ ------------ -------------  --------    ---------
<S>                                                              <C>          <C>          <C>            <C>         <C>       
INVESTMENT INCOME:                                      
 Dividends  . . . . . . . . . . . . . . . . . . . . . .          $          - $         21  $           5  $      2    $       5

                                                        
EXPENSES:                                               
  Mortality and expense risk fees  . . . . . . . . . . .                    -            -             -         -            -
  Administrative expense fees    . . . . . . . . . . . .                    -            -             -         -            -
                                                                 ------------ ------------  ------------  --------    ---------
    Total expenses . . . . . . . . . . . . . . . . . . .                    -            -             -         -            -
                                                                 ------------ ------------  ------------  --------    ---------

                                                        
  Net investment income  . . . . . . . . . . . . . . . .                    -           21             5         2            5
                                                                 ------------ ------------  ------------  --------    ---------
                                                        
                                                        
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:   
  Realized gain distributions from portfolio sponsors. .                    -           13            18        47           16
  Net realized gain from sales of investments  . . . . .                    -            -             -         -            -
                                                                 ------------ ------------  ------------  --------    ---------
    Net realized gain . . . . . . . . . . . . .  . . . .                    -           13            18        47           16
  Net unrealized gain (loss) . . . . . . . . . . . . . .                  (36)         (60)          (94)       (6)         (33)
                                                                 ------------ ------------  ------------  --------    ---------
    Net realized and unrealized  gain (loss) . . . . . .                  (38)         (46)          (17)       41          (18)
                                                                 ------------ ------------  ------------  --------    ---------
    Net increase (decrease) in net assets from          
      operations . . . . . . . . . . . . . . . . . . . .         $        (38)$        (25) $        (12) $     43    $     (13)
                                                                 ------------ ------------  ------------  --------    ---------
                                                                 ------------ ------------  ------------  --------    --------- 

<CAPTION>

                                                                  FIDELITY    T. ROWE PRICE    DGPF         INVESCO     INVESCO
                                                                   VIP II     INTERNATIONAL INTERNATIONAL  INDUSTRIAL     TOTAL    
                                                                ASSET MANAGER   STOCK (A)     EQUITY       INCOME(A)   RETURN(A)
                                                                ------------- ------------  -------------  ----------  ---------
<S>                                                             <C>           <C>           <C>            <C>         <C>        
INVESTMENT INCOME:                                                                                                               
  Dividends  . . . . . . . . . . . . . . . . . . . . . .        $          10 $          -  $         11   $        -  $       -  
                                                                                                                                 
                                                                                                                                 
EXPENSES:                                                                                                                        
  Mortality and expense risk fees  . . . . . . . . . . .                    -            -             -            -          -  
  Administrative expense fees    . . . . . . . . . . . .                    -            -             -            -          -  
                                                                ------------- ------------  ------------   ----------  ---------
    Total expenses . . . . . . . . . . . . . . . . . . .                    -            -             -            -          -  
                                                                ------------- ------------  ------------   ----------  ---------
                                                                                                                                 
  Net investment income  . . . . . . . . . . . . . . . .                                                                         
                                                                           10            -            11            -          -
                                                                ------------- ------------  ------------   ----------  ---------
                                                                                                                                 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                                                                            
  Realized gain distributions from portfolio sponsors. .                   30            -             -            -          -
  Net realized gain from sales of investments  . . . . .                    -            -             -            -          -
                                                                ------------- ------------  ------------   ----------  ---------
    Net realized gain . . . . . . . . . . . . .  . . . .                   30            -             -            -          -
  Net unrealized gain (loss) . . . . . . . . . . . . . .                  (33)           -           (21)           -          -
                                                                ------------- ------------  -------------  ----------  ---------

    Net realized and unrealized  gain (loss) . . . . . .                   (4)           -           (21)           -          -
                                                                ------------- ------------  -------------  ----------  ---------
    Net increase (decrease) in net assets from                                                                                   
      operations . . . . . . . . . . . . . . . . . . . .        $           6 $          -  $        (10)  $        -  $       - 
                                                                ------------- ------------  -------------  ----------  ---------
                                                                ------------- ------------  -------------  ----------  ---------
</TABLE>


(a) For the period ended September 30, 1998, there were no transactions.

  The accompanying notes are an integral part of these financial statements.
    


                                     SA-4
<PAGE>
   
                                      CNA

                               GROUP VEL ACCOUNT   
      
                     STATEMENTS OF CHANGES IN NET ASSETS     

                                  (UNAUDITED)    
                      NINE MONTHS ENDED SEPTEMBER 30, 1998  

<TABLE>
<CAPTION>
                                                                                 INVESTMENT                                     
                                                                                    GRADE      MONEY     EQUITY    GOVERNMENT
                                                                         GROWTH    INCOME     MARKET      INDEX       BOND 
                                                                       ----------  ------    --------   --------  ------------
<S>                                                                     <C>      <C>          <C>       <C>       <C>           
INCREASE IN NET ASSETS :                                                                                                        
 FROM OPERATIONS:                                                                                                               
  Net investment income. . . . . . . . . . . . . . . . . . . . . . . .  $    3    $    12     $   9     $    4      $     9     
  Net realized gain on investments . . . . . . . . . . . . . . . . . .       4          -         -          1            -     
  Net unrealized gain (loss) on investments. . . . . . . . . . . . . .     (14)         8         -         18            9     
                                                                        ------    -------     -----     ------      -------
  Net increase in net assets from operations . . . . . . . . . . . . .      (7)        20         9         23           18     
                                                                        ------    -------     -----     ------      -------
 FROM CAPITAL TRANSACTIONS :                                                                                                    
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -          -         -          -            -     
  Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -          -         -          -            -     
  Insurance and other charges. . . . . . . . . . . . . . . . . . . . .       -          -         -          -            -     
  Other transfers from (to) the General Account of First Allmerica                                                              
   Financial Life Insurance Company (Sponsor). . . . . . . . . . . . .       -          -         -          -            -     
  Net increase in investments by First Allmerica Financial                                                                      
   Life Insurance Company (Sponsor). . . . . . . . . . . . . . . . . .       -          -         -          -            -     
                                                                        ------    -------     -----     ------      -------
  Net increase in net assets from capital transactions . . . . . . . .       -          -         -          -            -     
                                                                        ------    -------     -----     ------      -------
                                                                                                                                
  Net increase (decrease) in net assets. . . . . . . . . . . . . . . .      (7)        20         9         23           18     
                                                                                                                                
NET ASSETS:                                                                                                                     
 Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .     360        251       230        392          240     
                                                                        ------    -------     -----     ------      -------
 End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  353    $   271     $ 239     $  415      $   258     
                                                                        ------    -------     -----     ------      -------
                                                                        ------    -------     -----     ------      -------

<CAPTION>

                                                                        SELECT                 SELECT       SELECT         SELECT   
                                                                      AGGRESSIVE    SELECT     GROWTH        VALUE     INTERNATIONAL
                                                                        GROWTH      GROWTH   AND INCOME   OPPORTUNITY*     EQUITY   
                                                                       ----------    ------  -----------  ------------ ------------
<S>                                                                    <C>           <C>      <C>          <C>           <C>        
INCREASE IN NET ASSETS :                                                                                                            
 FROM OPERATIONS:                                                                                                                   
  Net investment income. . . . . . . . . . . . . . . . . . . . . . . .  $    -       $   -     $   3        $   -          $   2    
  Net realized gain on investments . . . . . . . . . . . . . . . . . .       -           4         1            1              -
  Net unrealized gain (loss) on investments. . . . . . . . . . . . . .     (36)         28       (13)         (28)           (10)
                                                                        ------       -----     -----        -----          -----
  Net increase in net assets from operations . . . . . . . . . . . . .     (36)         32        (9)         (27)            (8)
                                                                        ------       -----     -----        -----          -----
 FROM CAPITAL TRANSACTIONS :                                                                                                    
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -           -         -            -              -
  Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -           -         -            -              -
  Insurance and other charges. . . . . . . . . . . . . . . . . . . . .       -           -         -            -              -
  Other transfers from (to) the General Account of First Allmerica                                                              
   Financial Life Insurance Company (Sponsor). . . . . . . . . . . . .       -           -         -            -              -
  Net increase in investments by First Allmerica Financial                                                                      
   Life Insurance Company (Sponsor). . . . . . . . . . . . . . . . . .       -           -         -            -              -
                                                                        ------       -----     -----        -----          -----
  Net increase in net assets from capital transactions . . . . . . . .       -           -         -            -              -
                                                                        ------       -----     -----        -----          -----
                                                                                                                                 
  Net increase (decrease) in net assets. . . . . . . . . . . . . . . .     (36)         32        (9)         (27)            (8)
                                                                                                                                
NET ASSETS:                                                                                                                     
 Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .     351         386       359          355            289
                                                                        ------       -----     -----        -----          -----
 End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $ 315       $ 418     $ 350        $ 328          $ 281
                                                                        ------       -----     -----        -----          -----
                                                                        ------       -----     -----        -----          -----
</TABLE>

* Name changed. See Note 1.   


      The accompanying notes are an integral part of these financial statements.
    


                                     SA-5 
<PAGE>

   
                                      CNA

                               GROUP VEL ACCOUNT   
      
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)   
                                  (UNAUDITED)    
                      NINE MONTHS ENDED SEPTEMBER 30, 1998  


<TABLE>
<CAPTION>

                                                                     SELECT       FIDELITY      FIDELITY     FIDELITY   FIDELITY
                                                                     CAPITAL         VIP            VIP         VIP        VIP  
                                                                  APPRECIATION   HIGH INCOME  EQUITY-INCOME   GROWTH    OVERSEAS
                                                                  ------------   -----------  -------------  --------   --------
<S>                                                               <C>            <C>          <C>            <C>        <C>     
INCREASE IN NET ASSETS :                                                                                                        
 FROM OPERATIONS:                                                                                                               
  Net investment income. . . . . . . . . . . . . . . . . . . . .  $       -     $      21      $      5     $      2   $      5 
  Net realized gain on investments . . . . . . . . . . . . . . .          -            13            17           48         16 
  Net unrealized gain (loss) on investments. . . . . . . . . . .        (38)          (59)          (34)          (7)       (34)
                                                                  ---------      --------      --------     --------   -------- 
  Net increase in net assets from operations . . . . . . . . . .        (38)          (25)          (12)          43        (13)
                                                                  ---------      --------      --------     --------   -------- 
 FROM CAPITAL TRANSACTIONS :                                                                                                    
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . . .          -             -             -            -          - 
  Terminations . . . . . . . . . . . . . . . . . . . . . . . . .          -             -             -            -          - 
  Insurance and other charges. . . . . . . . . . . . . . . . . .          -             -             -            -          - 
  Other transfers from (to) the General Account of First
   Allmerica Financial Life Insurance Company (Sponsor). . . . .          -             -             -            -          - 
  Net increase in investments by First Allmerica Financial                                                                      
   Life Insurance Company (Sponsor). . . . . . . . . . . . . . .          -             -             -            -          - 
                                                                  ---------      --------      --------     --------   -------- 
  Net increase in net assets from capital transactions . . . . .          -             -             -            -          - 
                                                                  ---------      --------      --------     --------   -------- 
                                                                                                                                
  Net increase (decrease) in net assets. . . . . . . . . . . . .        (38)          (25)          (12)          43        (13)
                                                                                                                                
                                                                                                                                
NET ASSETS:                                                                                                                     
 Beginning of period . . . . . . . . . . . . . . . . . . . . . .        346           297           352          353        272 
                                                                  ---------      --------      --------     --------   -------- 
 End of period . . . . . . . . . . . . . . . . . . . . . . . . .  $     308      $    272      $    340     $    396   $    259 
                                                                  ---------      --------      --------     --------   -------- 
                                                                  ---------      --------      --------     --------   -------- 

<CAPTION>

                                                                  FIDELITY    T. ROWE PRICE      DGPF         INVESCO    INVESCO    
                                                                   VIP II    INTERNATIONAL  INTERNATIONAL   INDUSTRIAL    TOTAL     
                                                               ASSET MANAGER   STOCK (a)       EQUITY       INCOME (a)   RETURN (a) 
                                                               ------------- -------------  -------------   ----------   ---------  
<S>                                                             <C>          <C>            <C>             <C>          <C>
INCREASE IN NET ASSETS :                                                                                                            
 FROM OPERATIONS:                                                                                                                   
  Net investment income. . . . . . . . . . . . . . . . . . . .  $    10         $    -        $    11         $   -       $    -    
  Net realized gain on investments . . . . . . . . . . . . . .       29              -              -             -            -    
  Net unrealized gain (loss) on investments. . . . . . . . . .      (33)             -            (21)            -            -    
                                                                -------         ------        -------         -----       ------    
  Net increase in net assets from operations . . . . . . . . .        6              -            (10)            -            -    
                                                                -------         ------        -------         -----       ------    
 FROM CAPITAL TRANSACTIONS :                                                                                                        
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . .        -              -              -             -            -    
  Terminations . . . . . . . . . . . . . . . . . . . . . . . .        -              -              -             -            -    
  Insurance and other charges. . . . . . . . . . . . . . . . .        -              -              -             -            -    
  Other transfers from (to) the General Account of First
   Allmerica Financial Life Insurance Company (Sponsor). . . .        -              -              -             -            -    
  Net increase in investments by First Allmerica Financial                                                                          
   Life Insurance Company (Sponsor). . . . . . . . . . . . . .        -              -              -             -            -    
                                                                -------         ------        -------         -----       ------    
  Net increase in net assets from capital transactions . . . .        -              -              -             -            -    
                                                                -------         ------        -------         -----       ------    
                                                                                                                                    
  Net increase (decrease) in net assets. . . . . . . . . . . .        6              -            (10)            -            -    
                                                                                                                                    
                                                                                                                                    
NET ASSETS:                                                                                                                         
 Beginning of period . . . . . . . . . . . . . . . . . . . . .      311              -            278             -            -    
                                                                -------         ------        -------         -----       ------    
 End of period . . . . . . . . . . . . . . . . . . . . . . . .  $   317         $    -        $   268         $   -       $    -    
                                                                -------         ------        -------         -----       ------    
                                                                -------         ------        -------         -----       ------    
</TABLE>

(a) For the period ended September 30, 1998, there were no transactions. 


  The accompanying notes are an integral part of these financial statements.
    


                                     SA-6 
<PAGE>

   
                                  GROUP VEL ACCOUNT

                            NOTES TO FINANCIAL STATEMENTS

                                    (UNAUDITED)




NOTE 1 -- ORGANIZATION

     The Group VEL Account (Group VEL) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company) established on November
13, 1996 (initial investment by the Company occurred on May 1, 1995), for the
purpose of separating from the general assets of the Company those assets used
to fund the variable portion of certain flexible premium variable life policies
issued by the Company. The Company is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Group VEL are clearly identified and distinguished from the other
assets and liabilities of the Company. Group VEL cannot be charged with
liabilities arising out of any other business of the Company. 

     Group VEL is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Group VEL currently offers
twenty Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of the Allmerica Investment Trust (the Trust) managed by
Allmerica Investment Management Company, Inc., a wholly-owned subsidiary of
First Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or
the Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by  Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc. The Trust,  Fidelity VIP, 
Fidelity VIP II,  T. Rowe Price, DGPF  and INVESCO (the Funds) are open-end,
diversified management investment companies registered under the 1940 Act.
INVESCO is available only to employees of INVESCO and its affiliates. 

     Effective January 9, 1998, the investment portfolio of the Trust, which was
formerly known as Small-Mid Cap Value Fund changed its name to Select Value
Opportunity Fund.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

     INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price, DGPF, or INVESCO. Net realized gains and losses on securities
sold are determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price,  DGPF, or INVESCO at net asset value. 

     FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. The Company anticipates no tax liability
resulting from the operations of Group VEL. Therefore, no provision for income
taxes has been charged against Group VEL. 
    


                                         SA-7
<PAGE>

   
<TABLE>
<CAPTION>
premium =       $4,200 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         1
                                                 CURRENT COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            4,410        113       3,498     250,000        342       3,727    250,000         571      3,956          250,000
     2            9,041      3,049       6,903     250,000      3,726       7,580    250,000       4,431      8,285          250,000
     3           13,903      8,083      10,214     250,000      9,431      11,562    250,000      10,892     13,023          250,000
     4           19,008     12,363      13,429     250,000     14,610      15,676    250,000      17,144     18,209          250,000
     5           24,368     16,549      16,549     250,000     19,926      19,926    250,000      23,891     23,891          250,000
     6           29,996     19,572      19,572     250,000     24,317      24,317    250,000      30,118     30,118          250,000
     7           35,906     22,493      22,493     250,000     28,848      28,848    250,000      36,940     36,940          250,000
     8           42,112     25,312      25,312     250,000     33,524      33,524    250,000      44,423     44,423          250,000
     9           48,627     28,028      28,028     250,000     38,352      38,352    250,000      52,634     52,634          250,000
     10          55,469     30,638      30,638     250,000     43,333      43,333    250,000      61,650     61,650          250,000
     11          62,652     33,138      33,138     250,000     48,472      48,472    250,000      71,554     71,554          250,000
     12          70,195     35,493      35,493     250,000     53,743      53,743    250,000      82,417     82,417          250,000
     13          78,114     37,699      37,699     250,000     59,149      59,149    250,000      94,345     94,345          250,000
     14          86,430     39,761      39,761     250,000     64,704      64,704    250,000     107,466    107,466          250,000
     15          95,161     41,668      41,668     250,000     70,408      70,408    250,000     121,915    121,915          250,000
     16         104,330     43,410      43,410     250,000     76,262      76,262    250,000     137,845    137,845          250,000
     17         113,956     45,008      45,008     250,000     82,297      82,297    250,000     155,452    155,452          250,000
     18         124,064     46,451      46,451     250,000     88,516      88,516    250,000     174,935    174,935          250,000
     19         134,677     47,724      47,724     250,000     94,922      94,922    250,000     196,526    196,526          250,000
     20         145,821     48,812      48,812     250,000    101,523     101,523    250,000     220,422    220,422          268,915

   Age 60        95,161     41,668      41,668     250,000     70,408      70,408    250,000     121,915    121,915          250,000
   Age 65       145,821     48,812      48,812     250,000    101,523     101,523    250,000     220,422    220,422          268,915
   Age 70       210,477     50,529      50,529     250,000    137,542     137,542    250,000     380,085    380,085          440,898
   Age 75       292,995     43,810      43,810     250,000    180,464     180,464    250,000     636,102    636,102          680,629
</TABLE>
    


<PAGE>

   
<TABLE>
<CAPTION>
premium =       $4,200 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         1
                                                GUARANTEED COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            4,410          0       2,750     250,000          0       2,943    250,000           0      3,136          250,000
     2            9,041      1,544       5,397     250,000      2,101       5,955    250,000       2,684      6,537          250,000
     3           13,903      5,808       7,939     250,000      6,905       9,036    250,000       8,096     10,228          250,000
     4           19,008      9,305      10,370     250,000     11,116      12,182    250,000      13,165     14,231          250,000
     5           24,368     12,691      12,691     250,000     15,395      15,395    250,000      18,580     18,580          250,000
     6           29,996     14,897      14,897     250,000     18,672      18,672    250,000      23,307     23,307          250,000
     7           35,906     16,975      16,975     250,000     22,003      22,003    250,000      28,440     28,440          250,000
     8           42,112     18,917      18,917     250,000     25,382      25,382    250,000      34,015     34,015          250,000
     9           48,627     20,711      20,711     250,000     28,798      28,798    250,000      40,069     40,069          250,000
     10          55,469     22,343      22,343     250,000     32,238      32,238    250,000      46,643     46,643          250,000
     11          62,652     23,804      23,804     250,000     35,698      35,698    250,000      53,794     53,794          250,000
     12          70,195     25,086      25,086     250,000     39,169      39,169    250,000      61,581     61,581          250,000
     13          78,114     26,178      26,178     250,000     42,644      42,644    250,000      70,075     70,075          250,000
     14          86,430     27,072      27,072     250,000     46,119      46,119    250,000      79,360     79,360          250,000
     15          95,161     27,757      27,757     250,000     49,585      49,585    250,000      89,529     89,529          250,000
     16         104,330     28,204      28,204     250,000     53,019      53,019    250,000     100,679    100,679          250,000
     17         113,956     28,391      28,391     250,000     56,404      56,404    250,000     112,931    112,931          250,000
     18         124,064     28,279      28,279     250,000     59,710      59,710    250,000     126,417    126,417          250,000
     19         134,677     27,820      27,820     250,000     62,899      62,899    250,000     141,294    141,294          250,000
     20         145,821     26,968      26,968     250,000     65,934      65,934    250,000     157,756    157,756          250,000

   Age 60        95,161     27,757      27,757     250,000     49,585      49,585    250,000      89,529     89,529          250,000
   Age 65       145,821     26,968      26,968     250,000     65,934      65,934    250,000     157,756    157,756          250,000
   Age 70       210,477     15,288      15,288     250,000     77,718      77,718    250,000     271,927    271,927          315,436
   Age 75       292,995          0     -17,009     250,000     78,126      78,126    250,000     455,683    455,683          487,580
</TABLE>
    

<PAGE>

   
<TABLE>
<CAPTION>
premium =       $1,400 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE       30
                                                                                              SPECIFIED FACE AMOUNT=     $75,000 
                                                                                                  SUM INSURED OPTION        2
                                                 CURRENT COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            1,470        296       1,220      76,220        374       1,298     76,298         452      1,376           76,376
     2            3,014      1,366       2,416      77,416      1,598       2,648     77,648       1,840      2,890           77,890
     3            4,634      3,099       3,589      78,589      3,564       4,054     79,054       4,067      4,557           79,557
     4            6,336      4,493       4,738      79,738      5,271       5,515     80,515       6,146      6,391           81,391
     5            8,123      5,863       5,863      80,863      7,034       7,034     82,034       8,407      8,407           83,407
     6            9,999      6,964       6,964      81,964      8,613       8,613     83,613      10,626     10,626           85,626
     7           11,969      8,041       8,041      83,041     10,254      10,254     85,254      13,065     13,065           88,065
     8           14,037      9,093       9,093      84,093     11,958      11,958     86,958      15,747     15,747           90,747
     9           16,209     10,121      10,121      85,121     13,728      13,728     88,728      18,696     18,696           93,696
     10          18,490     11,123      11,123      86,123     15,564      15,564     90,564      21,937     21,937           96,937
     11          20,884     12,101      12,101      87,101     17,470      17,470     92,470      25,501     25,501          100,501
     12          23,398     13,053      13,053      88,053     19,447      19,447     94,447      29,418     29,418          104,418
     13          26,038     13,979      13,979      88,979     21,499      21,499     96,499      33,725     33,725          108,725
     14          28,810     14,880      14,880      89,880     23,626      23,626     98,626      38,459     38,459          113,459
     15          31,720     15,755      15,755      90,755     25,833      25,833    100,833      43,665     43,665          118,665
     16          34,777     16,603      16,603      91,603     28,120      28,120    103,120      49,387     49,387          124,387
     17          37,985     17,425      17,425      92,425     30,491      30,491    105,491      55,679     55,679          130,679
     18          41,355     18,220      18,220      93,220     32,948      32,948    107,948      62,597     62,597          137,597
     19          44,892     18,986      18,986      93,986     35,493      35,493    110,493      70,202     70,202          145,202
     20          48,607     19,725      19,725      94,725     38,129      38,129    113,129      78,565     78,565          153,565

   Age 60        97,665     25,188      25,188     100,188     69,865      69,865    144,865     224,648    224,648          301,028
   Age 65       132,771     26,059      26,059     101,059     89,487      89,487    164,487     368,989    368,989          450,167
   Age 70       177,576     24,963      24,963      99,963    111,369     111,369    186,369     599,790    599,790          695,756
   Age 75       234,759     20,924      20,924      95,924    134,670     134,670    209,670     969,569    969,569        1,044,569
</TABLE>
    


<PAGE>

   
<TABLE>
<CAPTION>
premium =       $1,400 

                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
                                                                                                 MALE NON-SMOKER AGE       30
                                                                                              SPECIFIED FACE AMOUNT=     $75,000 
                                                                                                  SUM INSURED OPTION        2

                                                GUARANTEED COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            1,470        115       1,039      76,039        183       1,107     76,107         251      1,175           76,175
     2            3,014      1,006       2,056      77,056      1,208       2,258     77,258       1,417      2,468           77,468
     3            4,634      2,563       3,053      78,053      2,964       3,454     78,454       3,399      3,889           78,889
     4            6,336      3,783       4,028      79,028      4,452       4,697     79,697       5,206      5,451           80,451
     5            8,123      4,979       4,979      79,979      5,985       5,985     80,985       7,165      7,165           82,165
     6            9,999      5,908       5,908      80,908      7,322       7,322     82,322       9,049      9,049           84,049
     7           11,969      6,813       6,813      81,813      8,707       8,707     83,707      11,116     11,116           86,116
     8           14,037      7,694       7,694      82,694     10,143      10,143     85,143      13,386     13,386           88,386
     9           16,209      8,549       8,549      83,549     11,628      11,628     86,628      15,875     15,875           90,875
     10          18,490      9,377       9,377      84,377     13,164      13,164     88,164      18,606     18,606           93,606
     11          20,884     10,180      10,180      85,180     14,752      14,752     89,752      21,603     21,603           96,603
     12          23,398     10,954      10,954      85,954     16,392      16,392     91,392      24,889     24,889           99,889
     13          26,038     11,701      11,701      86,701     18,087      18,087     93,087      28,496     28,496          103,496
     14          28,810     12,418      12,418      87,418     19,836      19,836     94,836      32,452     32,452          107,452
     15          31,720     13,107      13,107      88,107     21,643      21,643     96,643      36,793     36,793          111,793
     16          34,777     13,765      13,765      88,765     23,505      23,505     98,505      41,556     41,556          116,556
     17          37,985     14,393      14,393      89,393     25,425      25,425    100,425      46,782     46,782          121,782
     18          41,355     14,988      14,988      89,988     27,405      27,405    102,405      52,517     52,517          127,517
     19          44,892     15,549      15,549      90,549     29,442      29,442    104,442      58,809     58,809          133,809
     20          48,607     16,076      16,076      91,076     31,539      31,539    106,539      65,715     65,715          140,715

   Age 60        97,665     18,719      18,719      93,719     55,377      55,377    130,377     184,676    184,676          259,676
   Age 65       132,771     17,305      17,305      92,305     68,418      68,418    143,418     300,388    300,388          375,388
   Age 70       177,576     12,528      12,528      87,528     80,379      80,379    155,379     483,385    483,385          560,727
   Age 75       234,759      2,382       2,382      77,382     88,385      88,385    163,385     772,434    772,434          847,434
</TABLE>
    


<PAGE>

   
<TABLE>
<CAPTION>
premium =      $13,160 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         3

                                                 CURRENT COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>

     1           13,818      7,807     12,089     250,000      8,561     12,843     250,000       9,315       13,597         250,000
     2           28,327     18,477     23,944     250,000     20,744     26,210     250,000      23,102       28,568         250,000
     3           43,561     33,438     35,570     250,000     37,996     40,127     250,000      42,927       45,058         250,000
     4           59,557     45,904     46,970     250,000     53,551     54,617     250,000      62,160       63,226         250,000
     5           76,353     58,150     58,150     250,000     69,710     69,710     250,000      83,252       83,252         250,000
     6           93,989     69,115     69,115     250,000     85,434     85,434     250,000     105,281      105,281         282,152
     7          112,506     79,866     79,866     250,000    101,790    101,790     264,653     129,411      129,411         336,468
     8          131,950     90,411     90,411     250,000    118,725    118,725     299,186     155,840      155,840         392,716
     9          152,365    100,753    100,753     250,000    136,257    136,257     332,468     184,783      184,783         450,871
    10          173,801    110,838    110,838     262,686    154,399    154,399     365,926     216,466      216,466         513,024
    11          196,309    120,664    120,664     277,528    173,165    173,165     398,281     251,139      251,139         577,620
    12          219,943    130,213    130,213     290,374    192,540    192,540     429,363     289,027      289,027         644,531
    13          244,758    139,486    139,486     301,289    212,534    212,534     459,074     330,416      330,416         713,698
    14          270,814    148,489    148,489     311,827    233,164    233,164     489,644     375,619      375,619         788,799
    15          298,173    157,222    157,222     320,733    254,437    254,437     519,051     424,965      424,965         866,929
    16          326,899    165,675    165,675     329,693    276,342    276,342     549,920     478,781      478,781         952,773
    17          357,062    173,889    173,889     335,606    298,955    298,955     576,983     537,567      537,567       1,037,505
    18          388,733    181,854    181,854     341,885    322,266    322,266     605,861     601,725      601,725       1,131,243
    19          421,988    189,570    189,570     346,914    346,288    346,288     633,707     671,721      671,721       1,229,249
    20          456,905    197,043    197,043     350,737    371,035    371,035     660,442     748,071      748,071       1,331,567

  Age 60        298,173    157,222    157,222     320,733    254,437    254,437     519,051     424,965      424,965         866,929
  Age 65        456,905    197,043    197,043     350,737    371,035    371,035     660,442     748,071      748,071       1,331,567
  Age 70        659,493    230,403    230,403     364,036    505,052    505,052     797,982   1,243,638    1,243,638       1,964,948
  Age 75        918,052    257,576    257,576     365,758    657,001    657,001     932,941   1,996,120    1,996,120       2,834,490
</TABLE>
    


<PAGE>

   
<TABLE>
<CAPTION>
premium =      $13,160 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         3

                                                GUARANTEED COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1           13,818      6,188     10,470     250,000      6,853     11,135     250,000       7,518       11,800         250,000
     2           28,327     15,257     20,723     250,000     17,245     22,711     250,000      19,314       24,780         250,000
     3           43,561     28,632     30,763     250,000     32,619     34,750     250,000      36,936       39,067         250,000
     4           59,557     39,525     40,590     250,000     46,207     47,272     250,000      53,734       54,800         250,000
     5           76,353     50,212     50,212     250,000     60,304     60,304     250,000      72,138       72,138         250,000
     6           93,989     59,632     59,632     250,000     73,874     73,874     250,000      91,261       91,261         250,000
     7          112,506     68,846     68,846     250,000     88,003     88,003     250,000     112,207      112,207         291,739
     8          131,950     77,857     77,857     250,000    102,698    102,698     258,798     135,048      135,048         340,321
     9          152,365     86,664     86,664     250,000    117,832    117,832     287,510     159,938      159,938         390,249
    10          173,801     95,267     95,267     250,000    133,398    133,398     316,153     187,032      187,032         443,265
    11          196,309    103,671    103,671     250,000    149,399    149,399     343,617     216,511      216,511         497,974
    12          219,943    111,855    111,855     250,000    165,838    165,838     369,820     248,571      248,571         554,314
    13          244,758    119,764    119,764     258,690    182,724    182,724     394,684     283,431      283,431         612,211
    14          270,814    127,396    127,396     267,532    200,048    200,048     420,102     321,302      321,302         674,735
    15          298,173    134,757    134,757     274,904    217,817    217,817     444,347     362,434      362,434         739,365
    16          326,899    141,828    141,828     282,238    235,995    235,995     469,631     407,025      407,025         809,980
    17          357,062    148,630    148,630     286,857    254,610    254,610     491,396     455,394      455,394         878,911
    18          388,733    155,142    155,142     291,666    273,613    273,613     514,392     507,753      507,753         954,575
    19          421,988    161,356    161,356     295,281    292,981    292,981     536,155     564,362      564,362       1,032,783
    20          456,905    167,274    167,274     297,748    312,699    312,699     556,604     625,519      625,519       1,113,425

  Age 60        298,173    134,757    134,757     274,904    217,817    217,817     444,347     362,434      362,434         739,365
  Age 65        456,905    167,274    167,274     297,748    312,699    312,699     556,604     625,519      625,519       1,113,425
  Age 70        659,493    192,397    192,397     303,987    415,688    415,688     656,787   1,010,453    1,010,453       1,596,515
  Age 75        918,052    210,325    210,325     298,661    523,830    523,830     743,839   1,561,204    1,561,204       2,216,909
</TABLE>
    
<PAGE>
                 GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
 
This Prospectus describes certificates ("Certificate" or "Certificates") issued
under group flexible premium variable life insurance policies ("Policy" or
"Policies") offered by First Allmerica Financial Life Insurance Company
("Company") to eligible applicants ("Certificate Owners") who are members of a
non-qualified benefit plan having a minimum of five or more members, depending
on the group, and are Age 80 years old and under. Within limits, you may choose
the amount of initial premium desired and the initial Death Benefit. You have
the flexibility to vary the frequency and amount of premium payments, subject to
certain restrictions and conditions. You may withdraw a portion of the
Certificate's Surrender Value, or the Certificate may be fully surrendered at
any time, subject to certain limitations.
 
The Certificates permit you to allocate Net Premiums among up to 20 of 22
sub-accounts ("Sub-Accounts") of the Group VEL Account ("Separate Account"), a
separate account of the Company, and a fixed interest account ("General
Account") of the Company (together "Accounts"). Each Sub-Account invests its
assets in a corresponding investment portfolio of Allmerica Investment Trust
("Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"), Fidelity
Variable Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price
International Series, Inc. ("T. Rowe Price"), Delaware Group Premium Fund, Inc.
("DGPF") and INVESCO Variable Investment Funds, Inc. ("INVESCO VIF"). The
following underlying funds are available under the Certificates (certain Funds
may not be available in all states):
 
<TABLE>
<S>                                 <C>
ALLMERICA INVESTMENT TRUST          FIDELITY VIP
Select Aggressive Growth Fund       Overseas Portfolio
Select Capital Appreciation Fund    Equity-Income Portfolio
Select Value Opportunity Fund       Growth Portfolio
Select Emerging Markets Fund        High Income Portfolio
Select International Equity Fund
Select Growth Fund                  FIDELITY VIP II
Select Strategic Growth Fund        Asset Manager Portfolio
Growth Fund
Equity Index Fund                   T. ROWE PRICE
Select Growth and Income Fund       T. Rowe Price International Stock
                                    Portfolio
Investment Grade Income Fund
Government Bond Fund                INVESCO VIF*
Money Market Fund                   Total Return Fund
                                    Industrial Income Fund
DGPF
International Equity Series
</TABLE>
 
*The Total Return Fund and the Industrial Income Fund of INVESCO VIF are
available only to employees of INVESCO and its affiliates.
 
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, FIDELITY VARIABLE INSURANCE PRODUCTS FUND, FIDELITY
VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.,
DELAWARE GROUP PREMIUM FUND, INC., AND INVESCO VARIABLE INVESTMENT FUNDS, INC.
THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY INVEST IN HIGHER-YIELDING,
HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES AND
POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS
FOR FUTURE REFERENCE.
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 
THE CERTIFICATES ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CERTIFICATES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CERTIFICATES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS
IN THE CERTIFICATES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF
VALUE AND POSSIBLE LOSS OF PRINCIPAL.
 
                               DATED MAY 1, 1998
               440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
                                 (508) 855-1000
<PAGE>
(Continued from cover page)
 
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
 
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (See "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
 
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
 
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY OR CERTIFICATE.
 
                                       2
<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<S>                                                                                     <C>
SPECIAL TERMS.........................................................................          5
SUMMARY...............................................................................          8
PERFORMANCE INFORMATION...............................................................         17
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS............         22
INVESTMENT OBJECTIVES AND POLICIES....................................................         24
INVESTMENT ADVISORY SERVICES..........................................................         26
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.....................................         29
VOTING RIGHTS.........................................................................         29
THE CERTIFICATE.......................................................................         30
  Enrollment Form for a Certificate...................................................         30
  Free-Look Period....................................................................         31
  Conversion Privileges...............................................................         31
  Premium Payments....................................................................         32
  Allocation of Net Premiums..........................................................         32
  Transfer Privilege..................................................................         33
  Election of Death Benefit Options...................................................         34
  Guideline Premium Test and Cash Value Accumulation Test.............................         34
  Death Proceeds......................................................................         35
  Change in Death Benefit Option......................................................         37
  Change in Face Amount...............................................................         37
  Certificate Value and Surrender Value...............................................         39
  Payment Options.....................................................................         40
  Optional Insurance Benefits.........................................................         40
  Surrender...........................................................................         40
  Paid-Up Insurance Option............................................................         40
  Partial Withdrawal..................................................................         41
CHARGES AND DEDUCTIONS................................................................         41
  Premium Expense Charge..............................................................         42
  Monthly Deduction from Certificate Value............................................         42
  Charges Reflected in the Assets of the Separate Account.............................         45
  Surrender Charge....................................................................         45
  Charges on Partial Withdrawal.......................................................         47
  Transfer Charges....................................................................         47
  Charge for Change in Face Amount....................................................         48
  Other Administrative Charges........................................................         48
CERTIFICATE LOANS.....................................................................         48
CERTIFICATE TERMINATION AND REINSTATEMENT.............................................         49
OTHER CERTIFICATE PROVISIONS..........................................................         51
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY.......................................         53
DISTRIBUTION..........................................................................         54
SERVICES..............................................................................         54
REPORTS...............................................................................         54
LEGAL PROCEEDINGS.....................................................................         55
FURTHER INFORMATION...................................................................         55
INDEPENDENT ACCOUNTANTS...............................................................         55
FEDERAL TAX CONSIDERATIONS............................................................         55
  The Company and the Separate Account................................................         55
  Taxation of the Certificates........................................................         56
  Certificate Loans...................................................................         56
  Modified Endowment Contracts........................................................         57
</TABLE>
 
                                       3
<PAGE>
<TABLE>
<S>                                                                                     <C>
MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................................         57
FINANCIAL STATEMENTS..................................................................         59
APPENDIX A -- OPTIONAL BENEFITS.......................................................        A-1
APPENDIX B -- PAYMENT OPTIONS.........................................................        B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES AND ACCUMULATED
 PREMIUMS.............................................................................        C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES................................        D-1
</TABLE>
 
                                       4
<PAGE>
                                 SPECIAL TERMS
 
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
 
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
 
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
 
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
 
COMPANY: First Allmerica Financial Life Insurance Company.
 
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
 
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
 
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
 
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
 
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
 
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
 
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
 
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate.
 
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
 
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard Ordinary
Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex
Certificates), net investment earnings at an annual effective rate of 5%, and
fees and charges as set forth in the Certificate and any
 
                                       5
<PAGE>
Certificate riders. The Death Benefit Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
 
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
 
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
 
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
 
MINIMUM DEATH BENEFIT: The minimum Death Benefit required to qualify the
Certificate as "life insurance" under federal tax laws. The Minimum Death
Benefit varies by Age. It is calculated by multiplying the Certificate Value by
a percentage determined by the Insured's Age.
 
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
 
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
 
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
 
NET PREMIUM: An amount equal to the premium less any premium expense charge.
 
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
 
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
 
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
 
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
 
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Fidelity Variable Insurance Products
Fund or the Fidelity Variable Insurance Products Fund II, the T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc. or the
International Equity Series of the Delaware Group Premium Fund, Inc. The Total
Return Fund and the Industrial Income Fund of INVESCO VIF are available only to
employees of INVESCO Funds Group, Inc. and its affiliates.
 
                                       6
<PAGE>
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
 
UNDERLYING FUNDS ("FUNDS"): The Funds of Allmerica Investment Trust, the
Portfolios of Fidelity Variable Insurance Products Fund and Fidelity Variable
Insurance Products Fund II, the Portfolio of T. Rowe Price International Series,
Inc., the Series of Delaware Group Premium Fund, Inc., and the Funds of INVESCO
Variable Investment Funds, Inc., which are available under the Certificates.
 
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
 
UNIT: A measure of your interest in a Sub-Account.
 
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
 
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
 
WRITTEN REQUEST: A request by the Certificate Owner in writing, satisfactory to
the Company.
 
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
 
                                       7
<PAGE>
                                    SUMMARY
 
THE CERTIFICATE
 
The Certificate issued under a group flexible premium variable life Policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
 
    - life insurance coverage on the named Insured;
 
    - Certificate Value;
 
    - surrender rights and partial withdrawal rights;
 
    - loan privileges; and
 
    - in some cases, additional insurance benefits available by rider for an
      additional charge.
 
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. Although you may establish a schedule of premium payments
("planned premium payments"), failure to make the planned premium payments will
not necessarily cause a Certificate to lapse, nor will making the planned
premium payments guarantee that a Certificate will remain in force. Thus, you
may, but are not required to, pay additional premiums.
 
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
 
SURRENDER CHARGES
 
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
 
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
 
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the
 
                                       8
<PAGE>
maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
 
SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
 
A separate surrender charge may apply to and be calculated for each increase in
the Face Amount. The maximum surrender charge for the increase is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge of up to
$8.50 per thousand dollars of increase, and (b) is a deferred sales charge of up
to 50% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to the Guideline
Annual Premium for the increase. In accordance with limitations under state
insurance regulations, the amount of the surrender charge will not exceed a
specified amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
 
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
 
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge."
 
PREMIUM EXPENSE CHARGE
 
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from zero to 1% of premiums, depending on the group to which
the Policy is issued. The charge for distribution expenses may range from zero
to 5%. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
 
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
 
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
 
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
 
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-
 
                                       9
<PAGE>
Account to which it relates on a Monthly Processing Date, the unpaid balance
will be totaled and the Company will make a Pro-Rata Allocation.
 
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from Certificate Value."
 
TRANSACTION CHARGES
 
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
 
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
 
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
 
CHARGE FOR CHANGE IN FACE AMOUNT
 
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
 
TRANSFER CHARGE
 
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
 
OTHER ADMINISTRATIVE CHARGES
 
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
 
CHARGES OF THE UNDERLYING INVESTMENT FUNDS
 
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. See CHARGES AND
DEDUCTIONS -- "Charges Reflected in the Assets of the Separate Account." The
levels of fees and expenses vary among the Underlying Investment Funds.
 
CERTIFICATE VALUE AND SURRENDER VALUE
 
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has
 
                                       10
<PAGE>
been allocated, and partial withdrawals. The Certificate Value may be relevant
to the computation of the Death Proceeds. You bear the entire investment risk
for amounts allocated to the Separate Account. The Company does not guarantee a
minimum Certificate Value.
 
The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
 
DEATH PROCEEDS
 
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the Face Amount plus the Certificate Value or the Minimum Death
Benefit. The Minimum Death Benefit is equivalent to a percentage (determined
each month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE CERTIFICATE -- "Death Proceeds."
 
The Death Proceeds under the Certificate may be received in a lump sum or under
one of the Payment Options the Company offers. See APPENDIX B -- PAYMENT
OPTIONS.
 
FLEXIBILITY TO ADJUST DEATH BENEFIT
 
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Changes in Face Amount."
 
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
 
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider and Exchange
Option Rider. See APPENDIX A -- OPTIONAL BENEFITS.
 
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
 
CERTIFICATE ISSUANCE
 
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the
 
                                       11
<PAGE>
enrollment form and medical examination, if any, are completed. If the proposed
Insured cannot answer the eligibility questions "No," and if the proposed
Insured is not a standard risk, insurance coverage will begin only after the
Company (1) approves the enrollment form, (2) the Certificate is delivered and
accepted, and (3) the first premium is paid.
 
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
 
If your Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be allocated to the Money Market Fund of the Trust upon
Issuance and Acceptance of the Certificate. All Certificate Value will be
allocated as you have chosen no later than the expiration of the period during
which you may exercise the "Right-to-Examine Certificate" provision.
 
ALLOCATION OF NET PREMIUMS
 
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
 
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
 
INVESTMENT OPTIONS
 
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account is currently comprised
of 22 Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
Underlying Fund of the Allmerica Investment Trust ("Trust"), managed by
Allmerica Financial Investment Management Services, Inc. ("AFIMS"); of the
Fidelity Variable Insurance Products Fund ("Fidelity VIP") and the Fidelity
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by Fidelity
Management ("FMR"); T. Rowe Price International Series, Inc. ("T. Rowe Price"),
managed by Rowe Price-Fleming International, Inc. ("Price-Fleming"); of the
Delaware Group Premium Fund, Inc. ("DGPF"), managed by Delaware International
Advisers, Ltd. ("Delaware International"); and of INVESCO Variable Investment
Funds, Inc. ("INVESCO VIF") managed by INVESCO Funds Group, Inc. ("INVESCO"),
(available only to employees of INVESCO and its affiliates). In some states,
insurance regulations may restrict the availability of particular Underlying
Funds. The Certificates permit you to transfer Certificate Value among the
available Sub-Accounts and between the Sub-Accounts and the General Account,
subject to certain limitations described under THE CERTIFICATE -- "Transfer
Privilege."
 
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
 
                                       12
<PAGE>
CHARGES OF THE UNDERLYING FUNDS
 
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
 
<TABLE>
<CAPTION>
                                                                 MANAGEMENT FEE
                                                                   (AFTER ANY                         TOTAL EXPENSES
                                                                   VOLUNTARY        OTHER FUND          (AFTER ANY
UNDERLYING FUND                                                     WAIVER)          EXPENSES     APPLICABLE LIMITATIONS)
- -------------------------------------------------------------  ------------------  -------------  -----------------------
<S>                                                            <C>                 <C>            <C>
Select Aggressive Growth Fund................................         0.89%*             0.09%             0.98%(1)(3)
Select Capital Appreciation Fund.............................         0.95%              0.15%             1.10%(1)
Select Value Opportunity Fund................................         0.90%**            0.14%             1.04%(1)(3)
Select Emerging Markets Fund (@).............................         1.35%              0.65%             2.00%(1)
Select International Equity Fund.............................         0.92%              0.20%             1.12%(1)(3)
DGPF International Equity Series.............................         0.75%(4)           0.15%             0.90%(4)
Fidelity VIP Overseas Portfolio..............................         0.75%              0.17%             0.92%(2)
T. Rowe Price International Stock Portfolio..................         1.05%              0.00%             1.05%
Select Growth Fund...........................................         0.85%              0.08%             0.93%(1)(3)
Select Strategic Growth Fund (@).............................         0.85%              0.13%             0.98%(1)
Growth Fund..................................................         0.46%*             0.06%             0.52%(1)(3)
Fidelity VIP Growth Portfolio................................         0.60%              0.09%             0.69%(2)
Equity Index Fund............................................         0.31%              0.13%             0.44%(1)
Select Growth and Income Fund................................         0.70%*             0.07%             0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio.........................         0.50%              0.08%             0.58%(2)
Fidelity VIP II Asset Manager Portfolio......................         0.55%              0.10%             0.65%(2)
Fidelity VIP High Income Portfolio...........................         0.59%              0.12%             0.71%
Investment Grade Income Fund.................................         0.44%*             0.10%             0.54%(1)
Government Bond Fund.........................................         0.50%              0.17%             0.67%(1)
Money Market Fund............................................         0.27%              0.08%             0.35%(1)
INVESCO VIF Industrial Income Fund...........................         0.75%              0.16%             0.91%(##)
INVESCO VIF Total Return Fund................................         0.75%              0.17%             0.92%(##)
</TABLE>
 
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
 
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
 
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntary limitations took effect on January 1, 1997. Without these
adjustments, the management fee ratio and the total fund expense ratio would
have been 0.95% and 1.09%, respectively. The management fee limitation may be
terminated at any time.
 
(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Investment
Grade Income Fund and Government Bond Fund, and 0.60% for the Money Market Fund
and Equity Index Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1997.
 
                                       13
<PAGE>
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.
 
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.
 
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity-Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas Portfolio and
0.64% for Fidelity VIP II Asset Manager Portfolio.
 
(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expense ratios would have been 0.93% for the
Select Aggressive Growth Fund, 1.10% for the Select International Equity Fund,
0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for the
Select Value Opportunity Fund, and 0.74% for the Select Growth and Income Fund.
 
(4) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntary limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.
 
(##)Various expenses of the Industrial Income Fund and Total Return Fund were
voluntarily absorbed by INVESCO in 1997. If such expenses had not been
voluntarily absorbed, the total operating expenses ratios would have been 0.97%
and 1.10%, respectively.
 
FREE-LOOK PERIOD
 
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
 
If your Certificate provides for a full refund of the initial premium under its
"Right-to-Examine Certificate" provision as required in your state, your refund
will be the greater of (a) your entire premium, or (b) the Certificate Value
plus deductions under the Certificate, or by the Underlying Funds for taxes,
charges or fees. If your Certificate does not provide for a full refund of the
initial premium, you will receive the Certificate Value in the Separate Account,
plus premiums paid, including fees and charges, minus the amounts allocated to
the Separate Account, plus the fees and charges imposed on amounts in the
Separate Account. After an increase in the Face Amount, a right to cancel the
increase also applies. See THE CERTIFICATE -- "Free-Look Period."
 
CONVERSION PRIVILEGES
 
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24
 
                                       14
<PAGE>
Certificate months after the date of an increase in the Face Amount. Where
required by state law, and at your request, the Company will issue a flexible
premium adjustable life insurance Certificate to you. The new Certificate will
have the same face amount, issue Age, Date of Issue, and risk classifications as
the original Certificate. See THE CERTIFICATE -- "Conversion Privileges."
 
PARTIAL WITHDRAWAL
 
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
 
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by the amount of the partial withdrawal charge
deducted. See THE CERTIFICATE -- "Partial Withdrawal" and CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal."
 
LOAN PRIVILEGE
 
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge, Monthly Deductions, and
interest on the Certificate loan to the end of the Certificate year. Thereafter,
Loan Value is 90% of an amount equal to Certificate Value less the surrender
charge.
 
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the Accounts. In either
case, Certificate Value equal to the Certificate loan will be transferred from
the appropriate Sub-Accounts to the General Account, and will earn monthly
interest at an effective annual rate of at least 6%. Therefore, a Certificate
loan may have a permanent impact on the Certificate Value even though it is
eventually repaid. Although the loan amount is a part of the Certificate Value,
the Death Proceeds will be reduced by the amount of outstanding Debt at the time
of death.
 
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
 
PREFERRED LOAN OPTION
 
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary,
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
 
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
 
                                       15
<PAGE>
CERTIFICATE LAPSE AND REINSTATEMENT
 
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
 
TAX TREATMENT
 
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Certificate. Death Proceeds under the Certificate are excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
 
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
 
The Certificate summarizes the provisions of the group Policy under which it is
issued, which has the purpose of providing insurance protection for the
Beneficiary named therein. References to Certificate rights and features are
intended to represent a Certificate Owner's rights and benefits under the group
Policy. This Summary is intended to provide only a very brief overview of the
more significant aspects of the Certificate. Further detail is provided in this
Prospectus, the Certificate and the group Policy. No claim is made that the
Certificate is in any way similar or comparable to a systematic investment plan
of a mutual fund.
 
                                       16
<PAGE>
                            PERFORMANCE INFORMATION
 
The Certificates were first offered to the public in 1995. However, the Company
may advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Sub-Accounts have been in existence
(Tables I[A] and II[B], and based on the periods that the Underlying Funds have
been in existence (Tables II[A] and II[B]). The results for any period prior to
the Certificates being offered will be calculated as if the Certificates had
been offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in Table I) under a
"representative" Certificate that is surrendered at the end of the applicable
period. For more information on charges under the Certificates, see CHARGES AND
DEDUCTIONS.
 
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1997. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
 
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (2) other groups of variable life separate accounts or other
investment products tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds and other investment products
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons, such as Morningstar, Inc., who
rank such investment products on overall performance or other criteria; or (3)
the Consumer Price Index (a measure for inflation) to assess the real rate of
return from an investment. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
 
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
 
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       17
<PAGE>
                                   TABLE I(A)
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                      SINCE INCEPTION OF THE SUB-ACCOUNTS
          NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
 
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (non-smoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
 
<TABLE>
<CAPTION>
                                                                                TEN YEARS
                                                        FOR YEAR                 OR SINCE
                                                         ENDED        FIVE      INCEPTION
UNDERLYING FUND                                         12/31/97      YEARS     (IF LESS)
<S>                                                    <C>         <C>          <C>
Select Emerging Markets Fund                              N/A          N/A         N/A
Select Aggressive Growth Fund                             -97.09%      N/A         -91.37%
Select Capital Appreciation Fund                         -100.00%      N/A         -92.45%
Select Value Opportunity Fund                             -91.46%      N/A         -78.84%
T. Rowe Price International Stock Portfolio                  N/A       N/A        -100.00%
Fidelity VIP Overseas Portfolio                          -100.00%      N/A         -92.03%
Select International Equity Fund                         -100.00%      N/A         -92.55%
DGPF International Equity Series                         -100.00%      N/A         -92.63%
Fidelity VIP Growth Portfolio                             -92.71%      N/A         -87.53%
Select Growth Fund                                        -83.01%      N/A         -78.65%
Select Strategic Growth Fund                                 N/A       N/A            N/A
Growth Fund                                               -91.20%      N/A         -83.86%
Equity Index Fund                                         -84.52%      N/A         -77.82%
Fidelity VIP Equity-Income Portfolio                      -88.47%      N/A         -81.40%
Select Growth and Income Fund                             -93.61%      N/A         -84.58%
Fidelity VIP II Asset Manager Portfolio                   -95.32%      N/A         -87.84%
Fidelity VIP High Income Portfolio                        -98.05%      N/A         -89.76%
Investment Grade Income Fund                             -100.00%      N/A         -92.78%
Government Bond Fund                                     -100.00%      N/A         -93.12%
Money Market Fund                                        -100.00%      N/A         -93.35%
INVESCO VIF Industrial Income Fund                           N/A       N/A            N/A
INVESCO VIF Total Return Fund                                N/A       N/A            N/A
</TABLE>
 
The inception dates for the Sub-Accounts are: 11/13/96 for Growth, for
Investment Grade Income, for Money Market, for Equity Index, for Government
Bond, for Select Aggressive Growth, for Select Growth, for Select Growth and
Income, for Select Value Opportunity, for Select International Equity, for the
Select Capital Appreciation Fund, for Fidelity VIP Equity-Income, for Fidelity
VIP Growth, for Fidelity VIP High Income, for Fidelity VIP Overseas, for
Fidelity VIP II Asset Manager, for DGPF International Equity, and for the T.
Rowe Price International Stock. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       18
<PAGE>
                                   TABLE I(B)
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                      SINCE INCEPTION OF THE SUB-ACCOUNTS
          EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
 
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, all Sub-Account charges, and premium tax and expense
charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
 
<TABLE>
<CAPTION>
                                                                                       TEN YEARS
                                                              FOR YEAR                 OR SINCE
                                                               ENDED        FIVE       INCEPTION
UNDERLYING FUND                                               12/31/97      YEARS      (IF LESS)
<S>                                                          <C>         <C>          <C>
Select Emerging Markets Fund                                       N/A       N/A             N/A
Select Aggressive Growth Fund                                    17.94%      N/A           14.96%
Select Capital Appreciation Fund                                 13.54%      N/A            9.58%
Select Value Opportunity Fund                                    24.04%      N/A           27.90%
T. Rowe Price International Stock Portfolio                        N/A       N/A             N/A
Fidelity VIP Overseas Portfolio                                  10.83%      N/A           11.97%
Select International Equity Fund                                  3.97%      N/A            9.00%
DGPF International Equity Series                                  5.91%      N/A            8.57%
Fidelity VIP Growth Portfolio                                    22.68%      N/A           18.91%
Select Growth Fund                                               33.19%      N/A           28.10%
Select Strategic Growth Fund                                       N/A       N/A             N/A
Growth Fund                                                      24.32%      N/A           22.70%
Equity Index Fund                                                31.55%      N/A           28.96%
Fidelity VIP Equity-Income Portfolio                             27.28%      N/A           25.25%
Select Growth and Income Fund                                    21.71%      N/A           21.96%
Fidelity VIP II Asset Manager Portfolio                          19.86%      N/A           18.59%
Fidelity VIP High Income Portfolio                               16.90%      N/A           16.62%
Investment Grade Income Fund                                      8.74%      N/A            7.72%
Government Bond Fund                                              6.38%      N/A            5.82%
Money Market Fund                                                 4.78%      N/A            4.54%
INVESCO VIF Industrial Income Fund                                 N/A       N/A             N/A
INVESCO VIF Total Return Fund                                      N/A       N/A             N/A
</TABLE>
 
The inception dates for the Sub-Accounts are: 11/13/96 for Growth, for
Investment Grade Income, for Money Market, for Equity Index, for Government
Bond, for Select Aggressive Growth, for Select Growth, for Select Growth and
Income, for Select Value Opportunity, for Select International Equity, for the
Select Capital Appreciation Fund, for Fidelity VIP Equity-Income, for Fidelity
VIP Growth, for Fidelity VIP High Income, for Fidelity VIP Overseas, for
Fidelity VIP II Asset Manager, for DGPF International Equity, and for the T.
Rowe Price International Stock. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       19
<PAGE>
                                  TABLE II(A):
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                    SINCE INCEPTION OF THE UNDERLYING FUNDS
          NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
 
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (nonsmoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
 
<TABLE>
<CAPTION>
                                                                              TEN YEARS
                                                       FOR YEAR                OR SINCE
                                                        ENDED        FIVE     INCEPTION
UNDERLYING FUND                                        12/31/97     YEARS     (IF LESS)
<S>                                                   <C>         <C>         <C>
Select Emerging Markets Fund                                N/A         N/A         N/A
Select Aggressive Growth Fund                            -97.09%      11.26%      14.29%
Select Capital Appreciation Fund                        -100.00%        N/A       -4.18%
Select Value Opportunity Fund                            -91.46%        N/A       10.28%
T. Rowe Price International Stock Portfolio             -100.00%        N/A       -3.43%
Fidelity VIP Overseas Portfolio                         -100.00%       8.59%       6.20%
Select International Equity Fund                        -100.00%        N/A       -0.92%
DGPF International Equity Series                        -100.00%       6.12%       5.88%
Fidelity VIP Growth Portfolio                            -92.71%      12.46%      13.93%
Select Growth Fund                                       -83.01%       9.62%      11.09%
Select Strategic Growth Fund                                N/A         N/A         N/A
Growth Fund                                              -91.20%      10.83%      13.85%
Equity Index Fund                                        -84.52%      13.99%      15.51%
Fidelity VIP Equity-Income Portfolio                     -88.47%      14.62%      13.45%
Select Growth and Income Fund                            -93.61%      11.03%      10.08%
Fidelity VIP II Asset Manager Portfolio                  -95.32%       7.45%       8.90%
Fidelity VIP High Income Portfolio                       -98.05%       8.38%       9.46%
Investment Grade Income Fund                            -100.00%       1.98%       5.76%
Government Bond Fund                                    -100.00%       0.43%       2.16%
Money Market Fund                                       -100.00%      -0.82%       2.27%
INVESCO VIF Industrial Income Fund                       -88.41%        N/A        9.89%
INVESCO VIF Total Return Fund                            -93.24%        N/A        3.96%
</TABLE>
 
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for the T. Rowe Price
International Stock; 8/10/94 for INVESCO VIF Industrial Income; and 6/2/94 for
INVESCO VIF Total Return. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       20
<PAGE>
                                  TABLE II(B)
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                    SINCE INCEPTION OF THE UNDERLYING FUNDS
          EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
 
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE
OR SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
 
<TABLE>
<CAPTION>
                                                                                    TEN YEARS
                                                            FOR YEAR                OR SINCE
                                                             ENDED        FIVE      INCEPTION
UNDERLYING FUND                                             12/31/97     YEARS      (IF LESS)
<S>                                                        <C>         <C>         <C>
Select Emerging Markets Fund                                     N/A         N/A          N/A
Select Aggressive Growth Fund                                  17.94%      16.04%       18.79%
Select Capital Appreciation Fund                               13.54%        N/A        22.09%
Select Value Opportunity Fund                                  24.04%        N/A        16.17%
T. Rowe Price International Stock Portfolio                     2.42%        N/A         7.37%
Fidelity VIP Overseas Portfolio                                10.83%      13.38%        8.91%
Select International Equity Fund                                3.97%        N/A        10.42%
DGPF International Equity Series                                5.91%      10.92%       10.57%
Fidelity VIP Growth Portfolio                                  22.68%      17.23%       16.43%
Select Growth Fund                                             33.19%      14.40%       15.61%
Select Strategic Growth Fund                                     N/A         N/A          N/A
Growth Fund                                                    24.32%      15.61%       16.36%
Equity Index Fund                                              31.55%      18.76%       18.90%
Fidelity VIP Equity-Income Portfolio                           27.28%      19.38%       15.96%
Select Growth and Income Fund                                  21.71%      15.81%       14.61%
Fidelity VIP II Asset Manager Portfolio                        19.86%      12.24%       12.00%
Fidelity VIP High Income Portfolio                             16.90%      13.17%       12.07%
Investment Grade Income Fund                                    8.74%       6.81%        8.48%
Government Bond Fund                                            6.38%       5.27%        6.19%
Money Market Fund                                               4.78%       4.03%        5.11%
INVESCO VIF Industrial Income Fund                             27.34%        N/A        22.59%
INVESCO VIF Total Return Fund                                  22.11%        N/A        15.63%
</TABLE>
 
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for the T. Rowe Price
International Stock; 8/10/94 for INVESCO VIF Industrial Income; and 6/2/94 for
INVESCO VIF Total Return. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       21
<PAGE>
                    DESCRIPTION OF THE COMPANY, THE SEPARATE
                       ACCOUNT, AND THE UNDERLYING FUNDS
 
THE COMPANY
 
The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. As of December 31, 1997, the Company
and its subsidiaries had over $16.3 billion in combined assets. Effective
October 16, 1995, the Company converted from a mutual life insurance company,
known as State Mutual Life Assurance Company of America, to a stock life
insurance company and adopted its present name. The Company is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). The Company's principal
office 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 SEPARATE ACCOUNT
 
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
 
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account, and are kept separate from the general assets of the
Company. Under Massachusetts law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 22 Sub-Accounts. Each Sub-Account is administered and accounted for as part
of the general business of the Company, but the income, capital gains, or
capital losses of each Sub-Account are allocated to such Sub-Account, without
regard to other income, capital gains, or capital losses of the Company or the
other Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio ("Underlying Fund") of the Allmerica Investment Trust, the
Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc., the Delaware Group
Premium Fund, Inc., or the INVESCO Variable Investment Fund, Inc.
 
ALLMERICA INVESTMENT TRUST
 
Allmerica Investment Trust, formerly SMA Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of the Trust or its separate investment
Funds.
 
The Trust was established as a Massachusetts business trust on October 11, 1984
for the purpose of providing a vehicle for the investment of assets of various
separate accounts established by the Company or other affiliated insurance
companies. Thirteen investment portfolios of the Trust ("Funds") are available
under the
 
                                       22
<PAGE>
Certificates, each issuing a series of shares: Select Aggressive Growth Fund,
Select Capital Appreciation Fund, Select Value Opportunity Fund, Select Emerging
Markets Fund, Select Growth Fund, Select International Equity Fund, Select
Strategic Growth Fund, Growth Fund, Equity Index Fund, Select Growth and Income
Fund, Investment Grade Income Fund, Government Bond Fund, and Money Market Fund.
The assets of each Fund are held separate from the assets of the other Funds.
Each Fund operates as a separate investment vehicle and the income or losses of
one Fund generally have no effect on the investment performance of another Fund.
Shares of the Trust are not offered to the general public but solely to such
separate accounts.
 
AFIMS serves as investment adviser of the Trust and has entered into
sub-advisory agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Funds. See INVESTMENT ADVISORY SERVICES.
 
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
 
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and is registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Certificates: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio
and Fidelity VIP Overseas Portfolio.
 
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. The
Portfolios of Fidelity VIP, as part of their operating expenses, pay an
investment management fee to FMR. See "Investment Advisory Services to Fidelity
VIP and Fidelity VIP II Funds."
 
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II FUND
 
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see "Investment Advisory Services to Fidelity VIP and Fidelity VIP II Funds"),
is an open-end, diversified, management investment company organized as a
Massachusetts business trust on March 21, 1988 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the
Certificates: the Fidelity VIP II Asset Manager Portfolio.
 
T. ROWE PRICE INTERNATIONAL SERIES, INC.
 
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (see "Investment Advisory
Services to T. Rowe Price"), is an open-end, diversified, management investment
company organized as a Maryland corporation in 1994 and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Certificates: the T. Rowe Price International Stock Portfolio.
 
DELAWARE GROUP PREMIUM FUND, INC.
 
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. DGPF
was established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio is available under the Certificates: the International Equity Series
("Series"). The investment adviser for the International Equity Series is
Delaware International Advisers Ltd. ("Delaware International"). See "Investment
Advisory Services to DGPF."
 
                                       23
<PAGE>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
 
INVESCO Variable Investment Funds, Inc. ("INVESCO VIF") is an open-end,
diversified, management investment company that was organized as a Maryland
corporation on August 19, 1993, and is registered with the SEC under the 1940
Act. INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser of the
Industrial Income Fund and the Total Return Fund, the only Funds of INVESCO VIF
that are available under the Certificates. These two Funds are available only to
employees of INVESCO and its affiliates.
 
                       INVESTMENT OBJECTIVES AND POLICIES
 
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
 
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.
 
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
 
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.
 
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
 
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
 
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
 
FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
 
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
 
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
 
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
 
                                       24
<PAGE>
GROWTH FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Growth Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
 
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks. Equity Index
Fund -- seeks to provide investment results that correspond to the aggregate
price and yield performance of a representative selection of United States
publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500.
 
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
 
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.
 
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
 
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money market instruments.
 
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.
 
INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of fixed
income securities with the objective of seeking as high a level of total return
(including both income and capital appreciation) as is consistent with prudent
investment management.
 
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
 
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
 
THE FOLLOWING FUNDS OF INVESCO VARIABLE INVESTMENT FUNDS, INC. ARE AVAILABLE
ONLY TO EMPLOYEES OF INVESCO AND ITS AFFILIATES:
 
INVESCO VIF INDUSTRIAL INCOME FUND -- seeks the best possible current income
while following sound investment practices. Capital growth potential is an
additional but secondary consideration in the selection of portfolio securities.
The Fund seeks to achieve its objective by investing in securities which will
provide a relatively high yield and stable return and which, over a period of
years, may also provide capital appreciation.
 
                                       25
<PAGE>
INVESCO VIF TOTAL RETURN FUND -- seeks a high total return on investment through
capital appreciation and current income by investing in a combination of equity
securities (consisting of common stocks and, to a lesser degree, securities
convertible into common stock) and fixed income securities.
 
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
 
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
 
                          INVESTMENT ADVISORY SERVICES
 
INVESTMENT ADVISORY SERVICES TO THE TRUST
 
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trust has entered into a Management Agreement with AFIMS,
an indirect wholly owned subsidiary of the Company, to handle the day-to-day
affairs of the Trust. AFIMS, subject to review by the Trustees, is responsible
for the general management of the Funds. AFIMS also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities, and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with AFIMS.
 
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, and reports to shareholders, and
other expenses.
 
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund.
 
                                       26
<PAGE>
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
 
<TABLE>
<S>                            <C>                 <C>
Select Aggressive Growth Fund  First $100 million       1.00%
                               Next $150 million        0.90%
                               Over $250 million        0.85%
 
Select Capital Appreciation    First $100 million
Fund                                                    1.00%
                               Next $150 million        0.90%
                               Over $250 million        0.85%
 
Select Value Opportunity Fund  First $100 million       1.00%
                               Next $150 million        0.85%
                               Next $250 million        0.80%
                               Next $250 million        0.75%
                               Over $750 million        0.70%
 
Select Emerging Markets Fund   *                        1.35%
 
Select International Equity    First $100 million
Fund                                                    1.00%
                               Next $150 million        0.90%
                               Over $250 million        0.85%
 
Select Growth Fund             *                        0.85%
 
Select Strategic Growth Fund   *                        0.85%
 
Growth Fund                    First $250 million       0.60%
                               Next $250 million        0.40%
                               Over $500 million        0.35%
 
Equity Index Fund              First $50 million        0.35%
                               Next $200 million        0.30%
                               Over $250 million        0.25%
 
Select Growth and Income Fund  First $100 million       0.75%
                               Next $150 million        0.70%
                               Over $250 million        0.65%
 
Investment Grade Income Fund   First $50 million        0.50%
                               Next $50 million         0.45%
                               Over $100 million        0.40%
 
Government Bond Fund           *                        0.50%
 
Money Market Fund              First $50 million        0.35%
                               Next $200 million        0.25%
                               Over $250 million        0.20%
</TABLE>
 
* For the Select Emerging Markets Fund, the Select Growth Fund, the Select
Strategic Growth Fund, and the Government Bond Fund, the investment management
fee does not vary according to the level of assets in the Fund. AFIMS' fee
computed for each Fund will be paid from the assets of such Fund. AFIMS is
solely responsible for the payment of all fees for investment management
services to the Sub-Advisers.
 
The prospectus of the Trust contains additional information concerning the
Funds, including information concerning additional expenses paid by the Funds
and paid to the Sub-Advisers, and should be read in conjunction with this
Prospectus.
 
                                       27
<PAGE>
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS
 
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectuses of Fidelity VIP and Fidelity VIP II contain additional
information concerning the Portfolios, including information concerning
additional expenses paid by the Portfolios, and should be read in conjunction
with this Prospectus.
 
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
 
1.  A group fee rate based on the monthly average net assets of all the mutual
    funds advised by FMR. On an annual basis, this rate cannot rise above 0.37%,
    and drops as total assets in all these funds rise.
 
2.  An individual fund fee rate of 0.45% of the Fidelity VIP High Income
    Portfolio's average net assets throughout the month.
 
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
 
The Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas and
the Fidelity VIP II Asset Manager Portfolios' fee rates are each made of two
components:
 
1.  A group fee rate based on the monthly average net assets of all of the
    mutual funds advised by FMR. On an annual basis, this rate cannot rise above
    0.52%, and drops as total assets in all these mutual funds rise.
 
2.  An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
    Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.45% for the
    Fidelity VIP Overseas Portfolio and 0.25% for the Fidelity VIP II Asset
    Manager Portfolio.
 
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
 
Thus, the Fidelity VIP High Income Portfolio may have a fee of as high as 0.82%
of its average net assets. The Fidelity VIP Equity-Income Portfolio may have a
fee of as high as 0.72% of its average net assets. The Fidelity VIP Growth
Portfolio may have a fee of as high as 0.82% of its average net assets. The
Fidelity VIP Overseas Portfolio may have a fee of as high as 0.97% of its
average net assets. The Fidelity VIP II Asset Manager Portfolio may have a fee
of as high as 0.77% of its average net assets. The actual fee rate may be less
depending on the total assets in the funds advised by FMR.
 
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
 
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers with approximately $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
average daily net assets.
 
INVESTMENT ADVISORY SERVICES TO DGPF
 
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
 
                                       28
<PAGE>
INVESTMENT ADVISORY SERVICES TO INVESCO VIF
 
INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser for INVESCO VIF,
and is primarily responsible for providing various investment management
administration services and supervising daily business affairs. The Industrial
Income Fund and the Total Return Fund each pay INVESCO a monthly fee equal to
0.75% annually of the first $500 million of the Fund's average daily net assets;
0.65% of the next $500 million of the Fund's average net assets and 0.55% of the
Fund's average net assets in excess of $1 billion. The prospectus of INVESCO VIF
contains additional information concerning other expenses paid by the Funds.
 
               ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
 
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
 
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund, or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Certificate Owners on a basis to be determined by the Company.
 
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price, the Series of DGPF, and the Funds of INVESCO VIF are
also issued to variable annuity and variable life separate accounts of other
unaffiliated insurance companies ("mixed and shared funding"). It is conceivable
that in the future such mixed funding or shared funding may be disadvantageous
for variable life contract owners or variable annuity contract owners. Although
the Company and the Underlying Investment Companies do not currently foresee any
such disadvantages to either variable life insurance contract owners or variable
annuity contract owners, the Company and the respective Trustees intend to
monitor events in order to identify any material conflicts between such contract
owners and to determine what action, if any, should be taken in response
thereto. If the Trustees were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the attendant expenses.
 
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
 
                                 VOTING RIGHTS
 
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. If
 
                                       29
<PAGE>
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Certificates, the Company reserves
the right to do so.
 
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
 
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
 
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Certificate Owners or the Trustees. The Company's disapproval of
any such change must be reasonable and, in the case of a change in investment
policies or investment adviser, based on a good faith determination that such
change would be contrary to state law or otherwise is inappropriate in light of
the objectives and purposes of the Underlying Funds. In the event the Company
does disregard voting instructions, a summary of and the reasons for that action
will be included in the next periodic report to Certificate Owners.
 
                                THE CERTIFICATE
 
ENROLLMENT FORM FOR A CERTIFICATE
 
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
 
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company (1) approves
the enrollment form, (2) the Certificate is delivered and accepted, and (3) the
first premium is paid.
 
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt
 
                                       30
<PAGE>
of the premium at the Principal Office. IF THE CERTIFICATE IS NOT ISSUED, THE
PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
 
If the Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be transferred to the Sub-Account investing in the Money
Market Fund of the Trust upon Issuance and Acceptance of the Certificate. All
Certificate Value will be allocated as you have chosen not later than the
expiration of the period during which you may exercise the "Right-to-Examine
Certificate" provision. If the "Payor Provision" is in effect, (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Payor Provisions"), Payor premiums which are
not "excess premiums" will be transferred to the Monthly Deduction Sub-Account
not later than three days after underwriting approval of the Certificate.
 
FREE-LOOK PERIOD
 
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
 
When you return the Certificate, the Company will, within seven days, mail a
refund. (The refund of any premium paid by check may be delayed until the check
has cleared your bank.) If the Certificate provides for a full refund of the
initial premium under its "Right-to-Examine Certificate" provision as required
in your state, your refund will be the greater of (a) your entire premium, or
(b) the Certificate Value plus deductions under the Certificate or by the
Underlying Funds for taxes, charges or fees. If the Certificate does not provide
for a full refund of the initial premium, you will receive the Certificate Value
in the Separate Account, plus premiums paid, including fees and charges, minus
the amounts allocated to the Separate Account, plus the fees and charges imposed
on amounts in the Separate Account.
 
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but for the increase. The amount to be
credited will be refunded if you so request. The Company will also waive any
surrender charge calculated for the increase.
 
CONVERSION PRIVILEGES
 
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
 
                                       31
<PAGE>
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
 
PREMIUM PAYMENTS
 
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
 
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
 
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $50.
 
Premiums are not limited as to frequency and number. However, no premium payment
may be less than $100 without the Company's consent. Moreover, premium payments
must be sufficient to cover the next Monthly Deduction plus loan interest
accrued, or the Certificate may lapse. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
 
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Certificate, if required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the
Death Benefit Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Certificate during a
Certificate year. See CERTIFICATE TERMINATION AND REINSTATEMENT.
 
ALLOCATION OF NET PREMIUMS
 
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%. You may change the allocation of future Net
Premiums at any time pursuant to written or telephone request. If allocation
changes by telephone are elected by the Certificate Owner, a properly completed
authorization form must be on file before telephone requests will be honored.
The policy of the Company and its agents and affiliates is that they will not be
responsible for losses resulting from acting upon telephone requests reasonably
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a
 
                                       32
<PAGE>
Certificate Owner identify themselves by name and identify the Certificate Owner
by name, date of birth and social security number. All transfer instructions by
telephone are tape recorded. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. No charge is currently
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
 
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
 
TRANSFER PRIVILEGE
 
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
 
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
 
Transfers involving the General Account are currently permitted only if:
 
(a) There has been at least a ninety (90) day period since the last transfer
    from the General Account; and
 
(b) The amount transferred from the General Account in each transfer does not
    exceed the lesser of $100,000 or 25% of the Accumulated Value under the
    Certificate.
 
These rules are subject to change by the Company.
 
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
 
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts ("Dollar Cost
Averaging Option"), or (b) to automatically reallocate Certificate Value among
the Sub-Accounts ("Automatic Rebalancing Option"). Automatic transfers may be
made on a monthly, bimonthly, quarterly, semiannual or annual schedule.
Generally, all transfers will be processed on the 15th of each scheduled month.
However, if the 15th is not a business day or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The Dollar
Cost Averaging Option and the Automatic Rebalancing Option may not be in effect
at the same time.
 
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
 
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and (4)
the maximum amount that may be transferred each time from the General Account.
 
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge.
 
                                       33
<PAGE>
Any transfers made with respect to a conversion privilege, Certificate loan or
material change in investment policy will not count towards the twelve free
transfers.
 
ELECTION OF DEATH BENEFIT OPTIONS
 
Federal tax law requires a minimum death benefit in relation to cash value for a
Certificate to qualify as life insurance. Under current federal tax law, either
the Guideline Premium test or the Cash Value Accumulation test can be used to
determine if the Certificate complies with the definition of "life insurance" in
Section 7702 of the Code. At the time of application, the Employer may elect
either of the tests.
 
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. If the Cash Value Accumulation
test is chosen by the employer, ONLY Death Benefit Option 3 will apply. Death
Benefits Option 1 and Option 2 are NOT available under the Cash Value
Accumulation test.
 
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
 
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the minimum
Death Benefit relative to the Certificate Value are different. Required
increases in the minimum Death Benefit due to growth in Certificate Value will
generally be greater under the Cash Value Accumulation test than under the
Guideline Premium test. APPLICANTS FOR A POLICY SHOULD CONSULT A QUALIFIED TAX
ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
 
OPTION 1 -- LEVEL DEATH BENEFIT
 
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Minimum Death Benefit, as set forth in the table below. Under Option 1, the
Death Benefit will remain level unless the Minimum Death Benefit is greater than
the Face Amount, in which case the Death Benefit will vary as the Certificate
Value varies. Option 1 will offer the best opportunity for the Certificate Value
under a Certificate to increase without increasing the Death Benefit as quickly
as it might under the other options. The Death Benefit will never go below the
Face Amount.
 
OPTION 2 -- ADJUSTABLE DEATH BENEFIT
 
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Minimum Death Benefit, as set forth in the
table below. The Death Benefit will, therefore, vary as the Certificate Value
changes, but will never be less than the Face Amount. Option 2 will offer the
best opportunity for the Certificate Owner who would like to have an increasing
Death Benefit as early as possible. The Death Benefit will increase whenever
there is an increase in the Certificate Value, and will decrease whenever there
is a decrease in the Certificate Value, but will never go below the Face Amount.
 
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
 
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the
 
                                       34
<PAGE>
Certificate at the "seven-pay" limit for the full seven years. When the
Certificate Value multiplied by the applicable Death Benefit Factor exceeds the
Face Amount, the Death Benefit will increase whenever there is an increase in
the Certificate Value, and will decrease whenever there is a decrease in the
Certificate Value, but will never go below the Face Amount. OPTION 3 MAY NOT BE
AVAILABLE IN ALL STATES.
 
DEATH PROCEEDS
 
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will be determined as of the date of the
Company's receipt of due proof of the Insured's death.
 
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
 
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
 
MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
 
The Minimum Death Benefit under Option 1 or Option 2 is equal to a percentage of
the Certificate Value as set forth below. The Minimum Death Benefit is
determined in accordance with the Code regulations to ensure that the
Certificate qualifies as a life insurance contract and that the insurance
proceeds may be excluded from the gross income of the Beneficiary.
 
                          MINIMUM DEATH BENEFIT TABLE
                            (Option 1 and Option 2)
 
<TABLE>
<CAPTION>
 Age of Insured                                                Percentage of
on Date of Death                                             Certificate Value
- ----------------------------------------------------------  -------------------
<S>                                                         <C>
    40 and under..........................................            250%
    45....................................................            215%
    50....................................................            185%
    55....................................................            150%
    60....................................................            130%
    65....................................................            120%
    70....................................................            115%
    75....................................................            105%
    80....................................................            105%
    85....................................................            105%
    90....................................................            105%
    95 and above..........................................            100%
</TABLE>
 
For the Ages not listed, the progression between the listed Ages is linear.
 
                                       35
<PAGE>
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
 
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
 
ILLUSTRATION OF OPTION 1
 
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt. Under Option 1, a Certificate with a
$50,000 Face Amount will generally have a Death Benefit equal to $50,000.
However, because the Death Benefit must be equal to or greater than 250% of
Certificate Value, if at any time the Certificate Value exceeds $20,000, the
Death Benefit will exceed the $50,000 Face Amount. In this example, each
additional dollar of Certificate Value above $20,000 will increase the Death
Benefit by $2.50. For example, a Certificate with a Certificate Value of $35,000
will have a Minimum Death Benefit of $87,500 ($35,000 X 2.50); Certificate Value
of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X 2.50);
and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
 
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
 
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
 
ILLUSTRATION OF OPTION 2
 
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
 
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Minimum Death Benefit will be $87,500 ($35,000 X 2.50); Certificate
Value of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X
2.50); and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
 
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is
 
                                       36
<PAGE>
less than the Face Amount plus Certificate Value, then the Death Benefit will be
the current Face Amount plus Certificate Value.
 
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
 
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
 
CHANGE IN DEATH BENEFIT OPTION
 
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of the request. No charges will be imposed on changes in Death Benefit Options.
IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
 
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Minimum Death Benefit). The
cost of insurance may be higher or lower than it otherwise would have been since
any increases or decreases in Certificate Value will, respectively, reduce or
increase the Insurance Amount at Risk under Option 1. Assuming a positive net
investment return with respect to any amounts in the Separate Account, changing
the Death Benefit Option from Option 2 to Option 1 will reduce the Insurance
Amount at Risk and, therefore, the cost of insurance charge for all subsequent
Monthly Deductions, compared to what such charge would have been if no such
change were made. If the Death Benefit Option is changed from Option 1 to Option
2, the Face Amount will be decreased to equal the Death Benefit less the
Certificate Value on the effective date of the change. This change may not be
made if it would result in a Face Amount less than $40,000. A change from Option
1 to Option 2 will not alter the amount of the Death Benefit at the time of the
change, but will affect the determination of the Death Benefit from that point
on. Because the Certificate Value will be added to the new specified Face
Amount, the Death Benefit will vary with the Certificate Value. Thus, under
Option 2, the Insurance Amount at Risk will always equal the Face Amount unless
the Minimum Death Benefit is in effect. The cost of insurance may also be higher
or lower than it otherwise would have been without the change in Death Benefit
Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Certificate
Value."
 
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
 
CHANGE IN FACE AMOUNT
 
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
 
                                       37
<PAGE>
INCREASES
 
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than an amount determined by the Company. This amount varies by
group but in no event will this amount exceed $10,000. You may not increase the
Face Amount after the Insured reaches Age 80. An increase must be accompanied by
an additional premium if the Certificate Value is less than $50 plus an amount
equal to the sum of two Monthly Deductions. On the effective date of each
increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
 
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. A surrender charge
will also be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value" and "Surrender Charge."
 
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and (2)
during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
 
DECREASES
 
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the decrease may be limited or Certificate Value may be returned to the
Certificate Owner (at your election) to the extent necessary to meet the
requirements. A return of Certificate Value may result in tax liability to you.
 
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
 
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
 
If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
 
                                       38
<PAGE>
CERTIFICATE VALUE AND SURRENDER VALUE
 
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined. Certificate Value and Surrender Value will reflect
frequency and amount of Net Premiums paid, interest credited to accumulations in
the General Account, the investment performance of the chosen Sub-Accounts, any
partial withdrawals, any loans, any loan repayments, any loan interest paid or
credited, and any charges assessed in connection with the Certificate.
 
CALCULATION OF CERTIFICATE VALUE
 
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
CERTIFICATE -- "Enrollment Form for a Certificate") less any Monthly Deductions
due. On each Valuation Date after the Date of Issue the Certificate Value will
be:
 
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
    determined for each Sub-Account by multiplying the value of a Unit in that
    Sub-Account on that date by the number of such Units allocated to the
    Certificate; plus
 
(2) the value in the General Account (including any amounts transferred to the
    General Account with respect to a loan).
 
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
 
THE UNIT
 
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
 
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
 
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
 
NET INVESTMENT FACTOR
 
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
 
                                       39
<PAGE>
(a) is the investment income of that Sub-Account for the Valuation Period, plus
    capital gains, realized or unrealized, credited during the Valuation Period;
    minus capital losses, realized or unrealized, charged during the Valuation
    Period; adjusted for provisions made for taxes, if any; and
 
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
    Period.
 
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor. Allocations to the
General Account are not converted into Units, but are credited interest at a
rate periodically set by the Company. See MORE INFORMATION ABOUT THE GENERAL
ACCOUNT.
 
PAYMENT OPTIONS
 
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
 
OPTIONAL INSURANCE BENEFITS
 
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
 
SURRENDER
 
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
 
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
 
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
 
PAID-UP INSURANCE OPTION
 
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
 
                                       40
<PAGE>
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING CERTIFICATE OWNER
RIGHTS AND BENEFITS WILL BE AFFECTED:
 
    - As described above, the Paid-Up Insurance benefit will be computed
      differently from the net Death Benefit and the Death Benefit options will
      not apply
 
    - We will not allow transfers of Certificate Value from the General Account
      back to the Separate Account
 
    - You may not make further payments
 
    - You may not increase or decrease the Face Amount or make partial
      withdrawals
 
    - Riders will continue only with our consent
 
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
 
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
 
PARTIAL WITHDRAWAL
 
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
 
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges On Partial Withdrawal." The Company will normally pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments." For important tax consequences which may result from partial
withdrawals, see FEDERAL TAX CONSIDERATIONS.
 
                             CHARGES AND DEDUCTIONS
 
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
 
                                       41
<PAGE>
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
 
PREMIUM EXPENSE CHARGE
 
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. The
premium tax charge may change when either the applicable jurisdiction changes or
the tax rate within the applicable jurisdiction changes. The Company should be
notified of any change in address of the Insured as soon as possible.
 
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 5%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
 
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
 
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See THE CERTIFICATE -- "Charge
for Change in Face Amount."
 
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
 
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
 
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
 
COST OF INSURANCE
 
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is
 
                                       42
<PAGE>
determined on a monthly basis, and is determined separately for the initial Face
Amount and for each subsequent increase in the Face Amount. Because the cost of
insurance depends upon a number of variables, it can vary from month to month
and from group to group.
 
CALCULATION OF THE CHARGE
 
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Minimum Death Benefit is not in effect.
 
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
 
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit Option
1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face Amount reduced by any Certificate Value
(minus rider charges) in excess of the initial Face Amount at the beginning of
the Certificate month.
 
If the Minimum Death Benefit is in effect under any Option, a monthly cost of
insurance charge will also be calculated for that portion of the Death Benefit
which exceeds the current Face Amount. This charge will be calculated by:
 
    - multiplying the cost of insurance rate applicable to the initial Face
      Amount times the Minimum Death Benefit (Certificate Value times the
      applicable percentage), minus
 
       - the greater of the Face Amount or the Certificate Value under Death
         Benefit Option 1 or Option 3, or
 
       - the Face Amount plus the Certificate Value under Death Benefit Option
         2.
 
When the Minimum Death Benefit is in effect, the cost of insurance charge for
the initial Face Amount and for any increases will be calculated as set forth in
the preceding two paragraphs.
 
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: Decreases."
 
COST OF INSURANCE RATES
 
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a guaranteed
or simplified underwriting basis. The amount of this portion will be determined
for each group, and may vary based on characteristics within the group.
 
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; the number of
persons eligible to participate in the plan; expected percentage of eligible
persons participating in the plan; and the amount of guaranteed or simplified
underwriting insurance to be issued. Larger groups, higher participation rates
and occupations with historically favorable mortality rates will generally
result in the individuals within that group being placed in a more favorable
Underwriting Class.
 
                                       43
<PAGE>
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and non-
smokers. Any change in the cost of insurance rates will apply to all persons of
the same insuring Age and Underwriting Class whose Certificates have been in
force for the same length of time.
 
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will have a lower cost of insurance than an Insured in a standard Underwriting
Class who, in turn, will have a lower cost of insurance than an Insured in a
substandard Underwriting Class with a higher mortality risk. The Underwriting
Classes may be divided into two categories or aggregated: smokers and
non-smokers. Non-smoking Insureds will incur lower cost of insurance rates than
Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
 
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
 
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
 
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
 
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
 
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
 
                                       44
<PAGE>
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
 
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
 
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. If the charge for mortality and expense risks is
not sufficient to cover actual mortality experience and expenses, the Company
will absorb the losses. If costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current profit to the Company, such profit will be available for use by the
Company for, among other things, the payment of distribution, sales and other
expenses. Since mortality and expense risks involve future contingencies which
are not subject to precise determination in advance, it is not feasible to
identify specifically the portion of the charge which is applicable to each.
 
CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
 
Because the Sub-Accounts purchase shares of the Underlying Investment Companies,
the value of the Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Investment Companies. The
prospectuses and Statements of Additional Information of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, and INVESCO VIF additional
information concerning such fees and expenses.
 
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
 
SURRENDER CHARGE
 
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
 
A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance of the Certificate is an amount up to the sum of (a) plus (b), where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of up to 50% (less
any premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. This reduction in the maximum
surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
 
                                       45
<PAGE>
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
 
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
 
The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
 
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase. See APPENDIX D -- CALCULATION
OF MAXIMUM SURRENDER CHARGES, for examples illustrating the calculation of the
maximum surrender charge for the initial Face Amount and for any increases, as
well as for the surrender charge based on actual premiums paid or associated
with any increases.
 
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
 
                                       46
<PAGE>
CHARGES ON PARTIAL WITHDRAWAL
 
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
 
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of withdrawal
(i.e., 15 years have passed from the Date of Issue and from the effective date
of any increase in the Face Amount).
 
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
 
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
 
    - first, the surrender charge for the most recent increase in the Face
      Amount;
 
    - second, the surrender charge for the next most recent increases
      successively;
 
    - last, the surrender charge for the initial Face Amount.
 
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
 
TRANSFER CHARGES
 
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
 
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund and Government Bond Fund of the Trust, respectively, to one or more
of the other Sub-Accounts, or (b) to reallocate Certificate Value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve free transfers allowed in each Certificate year. Each subsequent
automatic transfer is without charge and does not reduce the remaining number of
transfers which may be made without charge.
 
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account
 
                                       47
<PAGE>
will be free of charge, and in addition to the twelve free transfers in a
Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and CERTIFICATE
LOANS.
 
CHARGE FOR CHANGE IN FACE AMOUNT
 
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
 
OTHER ADMINISTRATIVE CHARGES
 
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
 
                               CERTIFICATE LOANS
 
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS
- --"Postponement of Payments."
 
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
 
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
 
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The current
credited rate is 7.1%; 8% for preferred loans. NO ADDITIONAL INTEREST WILL BE
CREDITED TO SUCH CERTIFICATE VALUE.
 
PREFERRED LOAN OPTION
 
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth Certificate anniversary,
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. The
Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
 
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
 
LOAN INTEREST CHARGED
 
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the
 
                                       48
<PAGE>
loan amount, if the new loan amount exceeds the Certificate Value in the General
Account, the Company will transfer Certificate Value equal to that excess loan
amount from the Certificate Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Certificate
Value in each Sub-Account bears to the total Certificate Value in all
Sub-Accounts.
 
REPAYMENT OF DEBT
 
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate Account cannot exceed Certificate Value previously transferred from
the Separate Account to secure the Debt.
 
If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
 
EFFECT OF CERTIFICATE LOANS
 
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
 
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
 
                   CERTIFICATE TERMINATION AND REINSTATEMENT
 
TERMINATION
 
The failure to make premium payments will not cause the Certificate to lapse
unless:
 
    - the Surrender Value is insufficient to cover the next Monthly Deduction
      plus loan interest accrued; or
 
    - if Debt exceeds the Certificate Value.
 
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
 
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
 
PAYOR PROVISIONS
 
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
 
                                       49
<PAGE>
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
 
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of premium which is due.
The premium may be paid during a grace period of 62 days, beginning on the
premium due date. If the necessary premium is not received by the Company within
31 days of the end of the grace period, a second notice will be sent to the
Payor. A 31-day grace period notice at this time will also be sent to you if the
Certificate Value is insufficient to cover the Monthly Deductions then due.
 
If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
 
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
 
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
 
REINSTATEMENT
 
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
 
    - a written enrollment form for reinstatement,
 
    - Evidence of Insurability; and
 
    - a premium that, after the deduction of the premium expense charge, is
      large enough to cover the Monthly Deductions for the three-month period
      beginning on the date of reinstatement.
 
SURRENDER CHARGE
 
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
 
CERTIFICATE VALUE ON REINSTATEMENT
 
The Certificate Value on the date of reinstatement is:
 
    - the Net Premium paid to reinstate the Certificate increased by interest
      from the date the payment was received at the Principal Office; PLUS
 
    - an amount equal to the Certificate Value less Debt on the date of default;
      MINUS
 
                                       50
<PAGE>
    - the Monthly Deduction due on the date of reinstatement. You may reinstate
      any Debt outstanding on the date of default or foreclosure.
 
                          OTHER CERTIFICATE PROVISIONS
 
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
 
CERTIFICATE OWNER
 
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while the
Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
is required whenever the Face Amount of insurance is increased.
 
BENEFICIARY
 
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
 
ASSIGNMENT
 
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
 
INCONTESTABILITY
 
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
 
SUICIDE
 
The Death Proceeds will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Certificate, without interest, less
any outstanding Debt and less any partial withdrawals. If the Insured commits
suicide, within two years from the effective date of any increase in the Death
Benefit, the Company's liability with respect to such increase will be limited
to a refund of the cost thereof. The Beneficiary will receive the administrative
charges and insurance charges paid for such increase.
 
                                       51
<PAGE>
AGE
 
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
 
POSTPONEMENT OF PAYMENTS
 
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers may be postponed whenever: (1) the New York Stock Exchange is
closed other than customary weekend and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the SEC, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Certificate of
any amounts derived from the premiums paid by check may be delayed until such
time as the check has cleared your bank.
 
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
 
                                       52
<PAGE>
                DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY                            PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------  ---------------------------------------------------------
<S>                                <C>
Bruce C. Anderson                  Director (since 1996) and Vice President (since 1984) of
  Director and Vice President      First Allmerica
 
Abigail M. Armstrong               Secretary (since 1996) and Counsel (since 1991) of First
  Secretary and Counsel            Allmerica
 
Robert E. Bruce                    Director and Chief Information Officer (since 1997), Vice
  Director, Vice President and     President (since 1995) of First Allmerica; and Corporate
  Chief Information Officer        Manager (1979 to 1995) of Digital Equipment Corporation
 
John P. Kavanaugh
  Director, Vice President and     Director and Chief Investment Officer (since 1996) and
  Chief Investment Officer         Vice President (since 1991) of First Allmerica
 
John F. Kelly
  Director, Senior Vice
  President,                       Director (since 1996), General Counsel (since 1981),
  General Counsel and Assistant    Senior Vice President (since 1986), and Assistant
  Secretary                        Secretary (since 1986) of First Allmerica
 
J. Barry May                       Director (since 1996) of First Allmerica; Director and
  Director                         President (since 1996), Vice President (1993 to 1996) and
                                   General Manager (1989 to 1993) of The Hanover Insurance
                                   Company
 
James R. McAuliffe                 Director (since 1996) of First Allmerica; Director (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 Executive    Director, Chairman of the Board, President and Chief
  Officer                          Executive Officer (since 1989) of First Allmerica
 
Edward J. Parry, III
  Director, Vice President,        Director and Chief Financial Officer (since 1996), Vice
  Chief Financial Officer and      President and Treasurer (since 1993), and Assistant Vice
  Treasurer                        President (1992 to 1993) of First Allmerica
 
Richard M. Reilly                  Director (since 1996), Vice President (since 1990) of
  Director and Vice President      First Allmerica; Director (since 1990) of Allmerica
                                   Investments, Inc.; and Director and President (since
                                   1990) of Allmerica Financial Investment Management
                                   Services, Inc.
 
Eric A. Simonsen                   Director (since 1996), Vice President (since 1990), and
  Director and Vice President      Chief Financial Officer (1990 to 1996) of First Allmerica
 
Phillip E. Soule                   Director (since 1996) and Vice President (since 1987) of
  Director and Vice President      First Allmerica
</TABLE>
 
                                       53
<PAGE>
                                  DISTRIBUTION
 
Allmerica Investments, Inc., an indirect subsidiary of the Company, acts as the
principal underwriter of the Certificates pursuant to a Sales and Administrative
Services Agreement with the Company and the Separate Account. Allmerica
Investments, Inc. is registered with the SEC as a broker-dealer and is a member
of the National Association of Securities Dealers ("NASD"). The Certificates are
sold by agents of the Company who are registered representatives of Allmerica
Investments, Inc., or of independent broker-dealers.
 
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issue of a
Certificate or an increase in the Face Amount, commissions may be up to 25% of
the first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 2.5% of first-year,
or 4% of renewal premiums. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales related
criteria. Other payments may be made for other services that do not directly
involve the sales of the Certificates. These services may include the
recruitment and training of personnel, production of promotional literature, and
similar services.
 
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
 
                                    SERVICES
 
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity
VIP II Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net
asset value, respectively, of the shares of such Underlying Funds held by the
Separate Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Separate Account.
The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
 
                                    REPORTS
 
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you. The annual
statement will summarize all of the above transactions and deductions of charges
during the Certificate year. It will also set forth the status of
 
                                       54
<PAGE>
the Death Proceeds, Certificate Value, Surrender Value, amounts in the
Sub-Accounts and General Account, and any Certificate loan(s).
 
In addition, you will be sent periodic reports containing financial statements
and other information for the Separate Account and the Underlying Investment
Companies as required by the 1940 Act.
 
                               LEGAL PROCEEDINGS
 
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
 
                              FURTHER INFORMATION
 
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
 
                            INDEPENDENT ACCOUNTANTS
 
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, and the financial
statements of the Group VEL Account of the Company as of December 31, 1997 and
for the periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
 
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Certificates.
 
                           FEDERAL TAX CONSIDERATIONS
 
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
 
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
 
THE COMPANY AND THE SEPARATE ACCOUNT
 
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account. Based on these expectations,
no charge is made for federal income taxes which may be attributable to the
Separate Account.
 
                                       55
<PAGE>
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
 
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
 
TAXATION OF THE CERTIFICATES
 
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See MODIFIED ENDOWMENT CONTRACTS.
 
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
 
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
 
CERTIFICATE LOANS
 
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may revoke your
request for a preferred loan.
 
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax
 
                                       56
<PAGE>
deduction for interest is allowed on policy or certificate loans, if the insured
is an officer or employee of, or is financially interested in, any business
carried on by the taxpayer. There is an exception to this rule which permits a
deduction for interest on loans up to $50,000 related to any policies or
certificates covering the greater of (1) five individuals, or (2) the lesser of
(a) 5% of the total number of officers and employees of the corporation, or (b)
20 individuals.
 
MODIFIED ENDOWMENT CONTRACTS
 
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level premiums.
 
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any 12-month period will be treated as a single
modified endowment contract in determining taxable distributions.
 
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
 
                   MORE INFORMATION ABOUT THE GENERAL ACCOUNT
 
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the Certificate and the General
Account may, however, be subject to certain generally applicable provisions of
the Federal Securities Laws concerning the accuracy and completeness of
statements made in prospectuses.
 
GENERAL DESCRIPTION
 
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
 
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
 
                                       57
<PAGE>
GENERAL ACCOUNT VALUE
 
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
 
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
 
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
 
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General Account, plus interest at the
Guaranteed Minimum Rate, plus any excess interest which the Company credits,
less the sum of all Certificate charges allocable to the General Account and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
 
THE CERTIFICATE
 
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
 
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CERTIFICATE LOANS
 
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate. Partial withdrawals are made on a
last-in/first-out basis from Certificate Value allocated to the General Account.
 
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
 
Certificate loans may also be made from the Certificate Value in the General
Account.
 
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
 
                                       58
<PAGE>
                              FINANCIAL STATEMENTS
 
Financial Statements for the Company and for the Separate Account are included
in this Prospectus beginning immediately after this section. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account.
 
                                       59
<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
 
                                      F-5
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy benefits, certain future
expenses and taxes and for 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.
 
                                      F-6
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
 
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
 
Policy loans are carried principally at unpaid principal balances.
 
During 1997, the Company 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-7
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
F.  DEFERRED POLICY ACQUISITION COSTS
 
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
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
 
                                      F-8
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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 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.
 
                                      F-9
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
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
 
                                      F-10
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
2.  SIGNIFICANT TRANSACTIONS
 
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
 
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
 
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
 
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
 
<TABLE>
<CAPTION>
                                                                                                 INCREASE (DECREASE)
                                                                                                 -------------------
<S>                                                                                              <C>
Revenue........................................................................................       $    (6.7)
                                                                                                          -----
                                                                                                          -----
Realized capital gains included in revenue.....................................................       $    (4.9)
                                                                                                          -----
                                                                                                          -----
Net income.....................................................................................       $    (6.1)
                                                                                                          -----
                                                                                                          -----
Unrealized appreciation on investments.........................................................       $     4.4
                                                                                                          -----
                                                                                                          -----
</TABLE>
 
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
 
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
 
                                      F-11
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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 $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.
 
                                      F-12
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
                                                               1997
                                          -----------------------------------------------
                                                        GROSS         GROSS
DECEMBER 31                               AMORTIZED   UNREALIZED   UNREALIZED      FAIR
(IN MILLIONS)                             COST (1)      GAINS        LOSSES       VALUE
- ----------------------------------------  ---------   ----------   -----------   --------
<S>                                       <C>         <C>          <C>           <C>
U.S. Treasury securities and U.S.
 government and agency securities.......  $   265.3     $  9.5       $  0.9      $  273.9
States and political subdivisions.......    2,200.6       78.3          3.1       2,275.8
Foreign governments.....................      110.8        8.5          2.2         117.1
Corporate fixed maturities..............    4,041.6      175.1         12.2       4,204.5
Mortgage-backed securities..............      374.5        9.7          2.0         382.2
                                          ---------   ----------   -----------   --------
Total fixed maturities..................  $ 6,992.8     $281.1       $ 20.4      $7,253.5
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
Equity securities.......................  $   341.1     $141.9       $  4.0      $  479.0
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
 
<CAPTION>
 
                                                               1996
                                          -----------------------------------------------
                                                        GROSS         GROSS
DECEMBER 31                               AMORTIZED   UNREALIZED   UNREALIZED      FAIR
(IN MILLIONS)                             COST (1)      GAINS        LOSSES       VALUE
- ----------------------------------------  ---------   ----------   -----------   --------
<S>                                       <C>         <C>          <C>           <C>
U.S. Treasury securities and U.S.
 government and agency securities.......  $   273.6     $  9.3       $  1.6      $  281.3
States and political subdivisions.......    2,236.9       48.5          7.7       2,277.7
Foreign governments.....................      108.0        7.3        --            115.3
Corporate fixed maturities..............    4,277.5      140.3         15.7       4,402.1
Mortgage-backed securities..............      383.1        4.7          2.7         385.1
                                          ---------   ----------   -----------   --------
Total fixed maturities..................  $ 7,279.1     $210.1       $ 27.7      $7,461.5
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
Equity securities.......................  $   327.9     $148.9       $  3.7      $  473.1
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
</TABLE>
 
(1) Amortized cost for fixed maturities and cost for equity securities.
 
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market 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
 
                                      F-13
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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-14
<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-15
<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-16
<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.
 
                                      F-17
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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 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>
 
                                      F-18
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.  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
 
                                      F-19
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
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>
 
                                      F-20
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
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.
 
                                      F-21
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
FIXED MATURITIES
 
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
 
EQUITY SECURITIES
 
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
 
MORTGAGE LOANS
 
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
 
POLICY LOANS
 
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
 
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-22
<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-23
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                      1997       1996
- -----------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                              <C>        <C>
Revenues
  Premiums.....................................................................................  $    58.3  $    61.7
  Net investment income........................................................................       53.4       52.6
  Realized investment loss.....................................................................        1.3       (0.7)
                                                                                                 ---------  ---------
Total revenues.................................................................................      113.0      113.6
                                                                                                 ---------  ---------
Benefits and expenses
  Policy benefits..............................................................................      100.5      101.2
  Policy acquisition expenses..................................................................        3.0        3.2
  Other operating expenses.....................................................................        0.4        0.6
                                                                                                 ---------  ---------
Total benefits and expenses....................................................................      103.9      105.0
                                                                                                 ---------  ---------
Contribution from the Closed Block.............................................................  $     9.1  $     8.6
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
Cash flows
  Cash flows from operating activities:
    Contribution from the Closed Block.........................................................  $     9.1  $     8.6
    Initial cash transferred to the Closed Block...............................................     --         --
    Change in deferred policy acquisition costs, net...........................................        2.9        3.4
    Change in premiums and other receivables...................................................     --            0.2
    Change in policy liabilities and accruals..................................................      (11.6)     (13.9)
    Change in accrued investment income........................................................        0.2        2.3
    Deferred Taxes.............................................................................       (5.1)       1.0
    Change in other assets.....................................................................       (2.9)      (1.6)
    Change in expenses and taxes payable.......................................................       (2.0)       1.7
    Other, net.................................................................................       (1.2)       1.4
                                                                                                 ---------  ---------
Net cash (used in) provided by operating activities............................................      (10.6)       3.1
                                                                                                 ---------  ---------
  Cash flows from investing activities:
    Sales, maturities and repayments of investments............................................      161.6      188.1
    Purchases of investments...................................................................     (161.4)    (196.9)
    Other, net.................................................................................       11.4       12.2
                                                                                                 ---------  ---------
Net cash provided by (used in) investing activities............................................       11.6        3.4
                                                                                                 ---------  ---------
Net increase in cash and cash equivalents......................................................        1.0        6.5
Cash and cash equivalents, beginning of year...................................................       24.1       17.6
                                                                                                 ---------  ---------
Cash and cash equivalents, end of year.........................................................  $    25.1  $    24.1
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.
 
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
 
                                      F-24
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
7.  DEBT
 
Short- and long-term debt consisted of the following:
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                        1997       1996
- -------------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                                <C>        <C>
Short-Term
  Commercial paper...............................................................................  $    33.0  $    37.8
  Other..........................................................................................     --            0.6
                                                                                                   ---------  ---------
Total short-term debt............................................................................  $    33.0  $    38.4
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
Long-term debt...................................................................................  $     2.6  $     2.7
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
 
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.
 
During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.
 
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.
 
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.
 
8.  FEDERAL INCOME TAXES
 
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                            1997       1996       1995
- -------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Federal income tax expense (benefit)
  Current............................................................................  $    83.3  $    96.8  $   119.7
  Deferred...........................................................................       14.2      (15.7)     (37.0)
                                                                                       ---------  ---------  ---------
Total................................................................................  $    97.5  $    81.1  $    82.7
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
                                      F-25
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                            1997       1996       1995
- -------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Expected federal income tax expense..................................................  $   131.8  $   122.3  $   105.6
  Tax-exempt interest................................................................      (37.9)     (35.3)     (32.2)
  Differential earnings amount.......................................................          -      (10.2)      (7.6)
  Dividend received deduction........................................................       (3.2)      (1.6)      (4.0)
  Changes in tax reserve estimates...................................................        7.8        4.7       19.3
  Other, net.........................................................................       (1.0)       1.2        1.6
                                                                                       ---------  ---------  ---------
Federal income tax expense...........................................................  $    97.5  $    81.1  $    82.7
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
 
The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                    1997       1996
- ---------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                            <C>        <C>
Deferred tax (assets) liabilities
  AMT carryforwards..........................................................................  $   (15.6) $   (16.3)
  Loss reserve discounting...................................................................     (391.6)    (355.1)
  Deferred acquisition costs.................................................................      291.8      249.4
  Employee benefit plans.....................................................................      (48.0)     (41.4)
  Investments, net...........................................................................      175.4      128.5
  Bad debt reserve...........................................................................      (14.3)     (26.2)
  Other, net.................................................................................       15.2       (5.8)
                                                                                               ---------  ---------
Deferred tax (asset) liability, net..........................................................  $    12.9  $   (66.9)
                                                                                               ---------  ---------
                                                                                               ---------  ---------
</TABLE>
 
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
 
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
 
                                      F-26
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
 
9.  PENSION PLANS
 
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.
 
Components of net pension expense were as follows:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                             1997       1996       1995
- --------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                     <C>        <C>        <C>
Service cost -- benefits earned during the year.......................................  $    19.9  $    19.0  $    19.7
Interest accrued on projected benefit obligations.....................................       23.5       21.9       21.1
Actual return on assets...............................................................      (64.0)     (42.2)     (89.3)
Net amortization and deferral.........................................................       29.0        9.3       66.1
                                                                                        ---------  ---------  ---------
Net pension expense...................................................................  $     8.4  $     8.0  $    17.6
                                                                                        ---------  ---------  ---------
                                                                                        ---------  ---------  ---------
</TABLE>
 
                                      F-27
<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-28
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
 
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                     1997       1996
- ----------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                             <C>        <C>
Accumulated postretirement benefit obligation:
  Retirees....................................................................................  $    40.7  $    40.4
  Fully eligible active plan participants.....................................................        7.0        7.5
  Other active plan participants..............................................................       24.1       24.4
                                                                                                ---------  ---------
                                                                                                     71.8       72.3
Plan assets at fair value.....................................................................     --         --
                                                                                                ---------  ---------
Accumulated postretirement benefit obligation in excess of plan assets........................       71.8       72.3
Unrecognized prior service benefit............................................................       15.3       23.8
Unrecognized loss.............................................................................       (0.8)      (5.0)
                                                                                                ---------  ---------
Accrued postretirement benefit costs..........................................................  $    86.3  $    91.1
                                                                                                ---------  ---------
                                                                                                ---------  ---------
</TABLE>
 
The components of net periodic postretirement benefit expense were as follows:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                               1997       1996       1995
- ----------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                       <C>        <C>        <C>
Service cost............................................................................  $     3.0  $     3.2  $     4.2
Interest cost...........................................................................        4.6        4.6        6.9
Amortization of gain....................................................................       (2.8)      (2.8)      (0.5)
                                                                                          ---------  ---------  ---------
Net periodic postretirement benefit expense.............................................  $     4.8  $     5.0  $    10.6
                                                                                          ---------  ---------  ---------
                                                                                          ---------  ---------  ---------
</TABLE>
 
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
 
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
 
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
 
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
 
                                      F-29
<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-30
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
12.  SEGMENT INFORMATION
 
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in five operating segments.
 
The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.
 
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
 
The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
 
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                   1997        1996        1995
- ---------------------------------------------------------------------------  ----------  ----------  ----------
<S>                                                                          <C>         <C>         <C>
Revenues:
  Risk Management
    Regional Property and Casualty.........................................  $  2,275.3  $  2,196.6  $  2,109.0
    Corporate Risk Management..............................................       396.3       361.5       328.5
                                                                             ----------  ----------  ----------
    Subtotal...............................................................     2,671.6     2,558.1     2,437.5
  Retirement and Asset Accumulation
    Allmerica Financial Services...........................................       470.6       450.9       487.1
    Institutional Services.................................................       243.4       270.7       330.2
    Allmerica Asset Management.............................................         8.7         8.8         4.4
                                                                             ----------  ----------  ----------
    Subtotal...............................................................       722.7       730.4       821.7
  Eliminations.............................................................       (10.1)       (8.7)       (4.4)
                                                                             ----------  ----------  ----------
Total......................................................................  $  3,384.2  $  3,279.8  $  3,254.8
                                                                             ----------  ----------  ----------
                                                                             ----------  ----------  ----------
</TABLE>
 
                                      F-31
<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-32
<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-33
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                      1997       1996       1995
- -------------------------------------------------------------------------------  ---------  ---------  ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S>                                                                              <C>        <C>        <C>
  Direct.......................................................................  $ 1,464.9  $ 1,299.8  $ 1,383.3
  Assumed......................................................................      101.2       85.8      146.1
  Ceded........................................................................     (120.6)      (2.2)    (229.1)
                                                                                 ---------  ---------  ---------
Net policy benefits, claims, losses, and loss adjustment expenses..............  $ 1,445.5  $ 1,383.4  $ 1,300.3
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
</TABLE>
 
15.  DEFERRED POLICY ACQUISITION COSTS
 
The following reflects changes to the deferred policy acquisition asset:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                         1997       1996       1995
- ----------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                 <C>        <C>        <C>
Balance at beginning of year......................................................  $   822.7  $   735.7  $   802.8
  Acquisition expenses deferred...................................................      617.7      560.8      504.8
  Amortized to expense during the year............................................     (476.0)    (483.5)    (470.3)
  Adjustment to equity during the year............................................      (11.1)       9.7      (50.4)
  Transferred to the Closed Block.................................................         --         --      (24.8)
  Adjustment for cession of term life insurance...................................         --         --      (26.4)
  Adjustment for cession of disability income insurance...........................      (38.6)        --         --
  Adjustment for revision of universal and variable universal life insurance
    mortality assumptions.........................................................       50.8         --         --
                                                                                    ---------  ---------  ---------
Balance at end of year............................................................  $   965.5  $   822.7  $   735.7
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
 
16.  LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
 
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
 
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
 
                                      F-34
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                      1997       1996       1995
- -------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                              <C>        <C>        <C>
Reserve for losses and LAE, beginning of the year..............................  $ 2,744.1  $ 2,896.0  $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
  Provision for insured events of the current year.............................    1,564.1    1,513.3    1,427.3
  Decrease in provision for insured events of prior years......................     (127.9)    (141.4)    (137.6)
                                                                                 ---------  ---------  ---------
Total incurred losses and LAE..................................................    1,436.2    1,371.9    1,289.7
                                                                                 ---------  ---------  ---------
Payments, net of reinsurance recoverable:
  Losses and LAE attributable to insured events of current year................      775.1      759.6      652.2
  Losses and LAE attributable to insured events of prior years.................      732.1      627.6      614.3
                                                                                 ---------  ---------  ---------
Total payments.................................................................    1,507.2    1,387.2    1,266.5
                                                                                 ---------  ---------  ---------
Change in reinsurance recoverable on unpaid losses.............................      (50.2)    (136.6)      51.1
                                                                                 ---------  ---------  ---------
Other(1)                                                                              (7.5)        --         --
                                                                                 ---------  ---------  ---------
Reserve for losses and LAE, end of year........................................  $ 2,615.4  $ 2,744.1  $ 2,896.0
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
</TABLE>
 
(1) Includes purchase accounting adjustments.
 
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
 
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
 
The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
 
                                      F-35
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
 
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
 
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
 
In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
 
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
 
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
 
17.  MINORITY INTEREST
 
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
 
                                      F-36
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
18.  CONTINGENCIES
 
REGULATORY AND INDUSTRY DEVELOPMENTS
 
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
 
LITIGATION
 
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
 
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
 
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
 
RESIDUAL MARKETS
 
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
 
YEAR 2000
 
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
 
                                      F-37
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
 
19.  STATUTORY FINANCIAL INFORMATION
 
The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:
 
<TABLE>
<CAPTION>
(IN MILLIONS)                                                                      1997       1996       1995
- -------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                              <C>        <C>        <C>
Statutory net income (Combined)
  Property and Casualty Companies..............................................  $   190.3  $   155.3  $   155.3
  Life and Health Companies....................................................      191.2      133.3      134.3
Statutory Shareholder's Surplus (Combined)
  Property and Casualty Companies..............................................  $ 1,279.8  $ 1,201.6  $ 1,128.4
  Life and Health Companies....................................................    1,221.3    1,120.1      965.6
</TABLE>
 
                                      F-38
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Group VEL Account of First Allmercia Financial Life
insurance Company
 
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select International Equity, Select Capital Appreciation, Fidelity
VIP High Income, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP
Overseas, Fidelity VIP II Asset Manager, T. Rowe Price International Stock, DGPF
International Equity INVESCO Industrial Income, and INVESCO Total Return)
constituting the Group VEL Account of First Allmerica Financial Life Insurance
Company at December 31, 1997, the results of each of their operations and the
changes in each of their net assets for each of the two years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of First Allmerica Financial Life
Insurance Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
 
/s/ Price Waterhouse LLP
 
PRICE WATERHOUSE LLP
 
Boston, Massachusetts
 
March 25, 1998
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF ASSETS AND LIABILITIES
                               DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                            INVESTMENT       MONEY                       GOVERNMENT
                                                GROWTH     GRADE INCOME     MARKET      EQUITY INDEX        BOND
                                              ----------   ------------   -----------   ------------   ---------------
<S>                                           <C>          <C>            <C>           <C>            <C>               <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................  $      360    $     251      $     230     $     392        $     240
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............          --           --             --            --               --
Investment in shares of T. Rowe Price
  International Series, Inc.................          --           --             --            --               --
Investment in shares of Delaware Group
  Premium Fund, Inc.........................          --           --             --            --               --
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................          --           --             --            --               --
                                              ----------   ------------   -----------   ------------   ---------------
  Total assets..............................         360          251            230           392              240
 
LIABILITIES:                                          --           --             --            --               --
                                              ----------   ------------   -----------   ------------   ---------------
  Net assets................................  $      360    $     251      $     230     $     392        $     240
                                              ----------   ------------   -----------   ------------   ---------------
                                              ----------   ------------   -----------   ------------   ---------------
 
Net asset distribution by category:
  Variable life policies....................  $       --    $      --      $      --     $      --        $      --
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................         360          251            230           392              240
                                              ----------   ------------   -----------   ------------   ---------------
                                              $      360    $     251      $     230     $     392        $     240
                                              ----------   ------------   -----------   ------------   ---------------
                                              ----------   ------------   -----------   ------------   ---------------
 
Units outstanding, December 31, 1997........         200          200            200           200              200
Net asset value per unit,
  December 31, 1997.........................  $ 1.798419    $1.256448      $1.149225     $1.961119        $1.197997
 
<CAPTION>
                                                   SELECT                              SELECT            SELECT         SELECT
 
                                                 AGGRESSIVE                            GROWTH            VALUE       INTERNATIONAL
 
                                                   GROWTH         SELECT GROWTH      AND INCOME       OPPORTUNITY*      EQUITY
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
<S>                                           <C>                 <C>             <C>                 <C>            <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................      $     351         $     386         $     359        $     355       $     289
 
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............             --                --                --               --              --
 
Investment in shares of T. Rowe Price
  International Series, Inc.................             --                --                --               --              --
 
Investment in shares of Delaware Group
  Premium Fund, Inc.........................             --                --                --               --              --
 
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................             --                --                --               --              --
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
  Total assets..............................            351               386               359              355             289
 
LIABILITIES:                                             --                --                --               --              --
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
  Net assets................................      $     351         $     386         $     359        $     355       $     289
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
Net asset distribution by category:
  Variable life policies....................      $      --         $      --         $      --        $      --       $      --
 
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................            351               386               359              355             289
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
                                                  $     351         $     386         $     359        $     355       $     289
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
Units outstanding, December 31, 1997........            200               200               200              200             200
 
Net asset value per unit,
  December 31, 1997.........................      $1.753583         $1.929040         $1.793007        $1.774635       $1.442621
 
</TABLE>
 
* Name changed. See Note 1.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-1
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
                               DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                 SELECT       FIDELITY       FIDELITY       FIDELITY     FIDELITY      FIDELITY
                                                CAPITAL          VIP            VIP           VIP          VIP          VIP II
                                              APPRECIATION   HIGH INCOME   EQUITY-INCOME     GROWTH      OVERSEAS    ASSET MANAGER
                                              ------------   -----------   -------------   ----------   ----------   -------------
<S>                                           <C>            <C>           <C>             <C>          <C>          <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................   $     346      $      --      $      --     $       --   $       --     $      --
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............          --            297            352            353          272           311
Investment in shares of T. Rowe Price
  International Series, Inc.................          --             --             --             --           --            --
Investment in shares of Delaware Group
  Premium Fund, Inc.........................          --             --             --             --           --            --
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................          --             --             --             --           --            --
                                              ------------   -----------   -------------   ----------   ----------   -------------
  Total assets..............................         346            297            352            353          272           311
 
LIABILITIES:                                          --             --             --             --           --            --
                                              ------------   -----------   -------------   ----------   ----------   -------------
  Net assets................................   $     346      $     297      $     352     $      353   $      272     $     311
                                              ------------   -----------   -------------   ----------   ----------   -------------
                                              ------------   -----------   -------------   ----------   ----------   -------------
 
Net asset distribution by category:
  Variable life policies....................   $      --      $      --      $      --     $       --   $       --     $      --
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................         346            297            352            353          272           311
                                              ------------   -----------   -------------   ----------   ----------   -------------
                                               $     346      $     297      $     352     $      353   $      272     $     311
                                              ------------   -----------   -------------   ----------   ----------   -------------
                                              ------------   -----------   -------------   ----------   ----------   -------------
 
Units outstanding, December 31, 1997........         200            200            200            200          200           200
Net asset value per unit,
  December 31, 1997.........................   $1.731812      $1.484711      $1.759719     $ 1.765047   $ 1.357742     $1.555159
 
<CAPTION>
 
                                                  T. ROWE PRICE                DGPF                 INVESCO              INVESCO
 
                                              INTERNATIONAL STOCK(A)   INTERNATIONAL EQUITY   INDUSTRIAL INCOME(A)   TOTAL RETURN(A)
 
                                              ----------------------   --------------------   --------------------   ---------------
 
<S>                                           <C>                      <C>                    <C>                    <C>
 
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................        $      --               $      --              $      --            $      --
 
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............               --                      --                     --                   --
 
Investment in shares of T. Rowe Price
  International Series, Inc.................               --                      --                     --                   --
 
Investment in shares of Delaware Group
  Premium Fund, Inc.........................               --                     278                     --                   --
 
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................               --                      --                     --                   --
 
                                                   ----------              ----------             ----------         ---------------
 
  Total assets..............................               --                     278                     --                   --
 
LIABILITIES:                                               --                      --                     --                   --
 
                                                   ----------              ----------             ----------         ---------------
 
  Net assets................................        $      --               $     278              $      --            $      --
 
                                                   ----------              ----------             ----------         ---------------
 
                                                   ----------              ----------             ----------         ---------------
 
Net asset distribution by category:
  Variable life policies....................        $      --               $      --              $      --            $      --
 
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................               --                     278                     --                   --
 
                                                   ----------              ----------             ----------         ---------------
 
                                                    $      --               $     278              $      --            $      --
 
                                                   ----------              ----------             ----------         ---------------
 
                                                   ----------              ----------             ----------         ---------------
 
Units outstanding, December 31, 1997........               --                     200                     --                   --
 
Net asset value per unit,
  December 31, 1997.........................        $1.000000               $1.392132              $1.000000            $1.000000
 
</TABLE>
 
(a) For the period ended 12/31/97, there were no transactions.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-2
<PAGE>
                               GROUP VEL ACCOUNT
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                         GROWTH
                                                   (UNAUDITED)     INVESTMENT GRADE INCOME
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $      6   $      5        $ 4   $     15   $14        $11
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Total expenses..........       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
  Net investment income.....        6          5          4         15    14         11
                                  ---        ---        ---        ---   ----       ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       58         26         18         --    --         --
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Net realized gain.......       58         26         18         --    --         --
  Net unrealized gain
    (loss)..................        9         17         17          6    (6)        11
                                  ---        ---        ---        ---   ----       ---
    Net realized and
      unrealized gain
      (loss)................       67         43         35          6    (6)        11
                                  ---        ---        ---        ---   ----       ---
    Net increase in net
      assets from
      operations............ $     73   $     48        $39   $     21   $ 8        $22
                                  ---        ---        ---        ---   ----       ---
                                  ---        ---        ---        ---   ----       ---
 
<CAPTION>
 
                                        MONEY MARKET                         EQUITY INDEX
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $     12   $   11        $  7       $        4   $   5         $ 1
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                                  ---   -------        ---              ---   ------        ---
    Total expenses..........       --       --          --               --      --          --
                                  ---   -------        ---              ---   ------        ---
  Net investment income.....       12       11           7                4       5           1
                                  ---   -------        ---              ---   ------        ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --       --          --               11       4          16
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                                  ---   -------        ---              ---   ------        ---
    Net realized gain.......       --       --          --               11       4          16
  Net unrealized gain
    (loss)..................       --       --          --               81      45          25
                                  ---   -------        ---              ---   ------        ---
    Net realized and
      unrealized gain
      (loss)................       --       --          --               92      49          41
                                  ---   -------        ---              ---   ------        ---
    Net increase in net
      assets from
      operations............ $     12   $   11        $  7       $       96   $  54         $42
                                  ---   -------        ---              ---   ------        ---
                                  ---   -------        ---              ---   ------        ---
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-3
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
                                     GOVERNMENT BOND
                                                   (UNAUDITED)    SELECT AGGRESSIVE GROWTH
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $     13   $     13        $ 9   $     --   $--        $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---        ---        ---   ---------  ----     -----
    Total expenses..........       --         --         --         --    --         --
                                  ---        ---        ---   ---------  ----     -----
  Net investment income.....       13         13          9         --    --         --
                                  ---        ---        ---   ---------  ----     -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --         --         --         29    21         --
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---        ---        ---   ---------  ----     -----
    Net realized gain.......       --         --         --         29    21         --
  Net unrealized gain
    (loss)..................        3         (5)         7         27    25         49
                                  ---        ---        ---   ---------  ----     -----
    Net realized and
      unrealized gain
      (loss)................        3         (5)         7         56    46         49
                                  ---        ---        ---   ---------  ----     -----
    Net increase in net
      assets from
      operations............ $     16   $      8        $16   $     56   $46        $49
                                  ---        ---        ---   ---------  ----     -----
                                  ---        ---        ---   ---------  ----     -----
 
<CAPTION>
 
                                       SELECT GROWTH                   SELECT GROWTH AND INCOME
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $      1   $    1        $ --       $        4   $   4         $ 2
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------        ---
    Total expenses..........       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------        ---
  Net investment income.....        1        1          --                4       4           2
                                  ---   -------      -----              ---   ------        ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       20       40          --               31      21          10
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------        ---
    Net realized gain.......       20       40          --               31      21          10
  Net unrealized gain
    (loss)..................       77       11          36               31      26          30
                                  ---   -------      -----              ---   ------        ---
    Net realized and
      unrealized gain
      (loss)................       97       51          36               62      47          40
                                  ---   -------      -----              ---   ------        ---
    Net increase in net
      assets from
      operations............ $     98   $   52        $ 36       $       66   $  51         $42
                                  ---   -------      -----              ---   ------        ---
                                  ---   -------      -----              ---   ------        ---
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-4
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
                                SELECT VALUE OPPORTUNITY*
                                                   (UNAUDITED)   SELECT INTERNATIONAL EQUITY
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $      2   $      2        $ 2   $      7   $ 5        $ 2
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Total expenses..........       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
  Net investment income.....        2          2          2          7     5          2
                                  ---        ---        ---        ---   ----       ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       47         12          5          9     1          1
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Net realized gain.......       47         12          5          9     1          1
  Net unrealized gain
    (loss)..................       22         49         14         (3)   44         23
                                  ---        ---        ---        ---   ----       ---
    Net realized and
      unrealized gain
      (loss)................       69         61         19          6    45         24
                                  ---        ---        ---        ---   ----       ---
    Net increase in net
      assets from
      operations............ $     71   $     63        $21   $     13   $50        $26
                                  ---        ---        ---        ---   ----       ---
                                  ---        ---        ---        ---   ----       ---
 
<CAPTION>
 
                                SELECT CAPITAL APPRECIATION            FIDELITY VIP HIGH INCOME
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $     --   $   --        $  5       $       18   $  17         $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                             ---------  -------        ---              ---   ------      -----
    Total expenses..........       --       --          --               --      --          --
                             ---------  -------        ---              ---   ------      -----
  Net investment income.....       --       --           5               18      17          --
                             ---------  -------        ---              ---   ------      -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --        1          --                2       3          --
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                             ---------  -------        ---              ---   ------      -----
    Net realized gain.......       --        1          --                2       3          --
  Net unrealized gain
    (loss)..................       43       23          74               25      11          21
                             ---------  -------        ---              ---   ------      -----
    Net realized and
      unrealized gain
      (loss)................       43       24          74               27      14          21
                             ---------  -------        ---              ---   ------      -----
    Net increase in net
      assets from
      operations............ $     43   $   24        $ 79       $       45   $  31         $21
                             ---------  -------        ---              ---   ------      -----
                             ---------  -------        ---              ---   ------      -----
</TABLE>
 
* Name changed. See Note 1.
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-5
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
                               FIDELITY VIP EQUITY-INCOME
                                                   (UNAUDITED)       FIDELITY VIP GROWTH
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $      4   $     --        $ 4   $      1   $ 1        $--
 
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---   ---------       ---        ---   ----     -----
    Total expenses..........       --         --         --         --    --         --
                                  ---   ---------       ---        ---   ----     -----
  Net investment income.....        4         --          4          1     1         --
                                  ---   ---------       ---        ---   ----     -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       24         11         --          9    17         --
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---   ---------       ---        ---   ----     -----
    Net realized gain.......       24         11         --          9    17         --
  Net unrealized gain
    (loss)..................       49         23         37         57    19         49
                                  ---   ---------       ---        ---   ----     -----
    Net realized and
      unrealized gain
      (loss)................       73         34         37         66    36         49
                                  ---   ---------       ---        ---   ----     -----
    Net increase in net
      assets from
      operations............ $     77   $     34        $41   $     67   $37        $49
                                  ---   ---------       ---        ---   ----     -----
                                  ---   ---------       ---        ---   ----     -----
 
<CAPTION>
 
                                   FIDELITY VIP OVERSEAS            FIDELITY VIP II ASSET MANAGER
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $      5   $    2        $ --       $        8   $   8         $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------      -----
    Total expenses..........       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------      -----
  Net investment income.....        5        2          --                8       8          --
                                  ---   -------      -----              ---   ------      -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       17        3          --               23       7          --
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------      -----
    Net realized gain.......       17        3          --               23       7          --
  Net unrealized gain
    (loss)..................        7       23          15               22      18          25
                                  ---   -------      -----              ---   ------      -----
    Net realized and
      unrealized gain
      (loss)................       24       26          15               45      25          25
                                  ---   -------      -----              ---   ------      -----
    Net increase in net
      assets from
      operations............ $     29   $   28        $ 15       $       53   $  33         $25
                                  ---   -------      -----              ---   ------      -----
                                  ---   -------      -----              ---   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-6
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
 
<TABLE>
<CAPTION>
                                DGPF INTERNATIONAL EQUITY
                                                   (UNAUDITED)
                                   FOR THE          FOR THE
                                  YEAR ENDED        PERIOD
                                 DECEMBER 31,      5/1/95**
                             --------------------     TO
                               1997       1996     12/31/95
                             ---------  ---------  ---------
<S>                          <C>        <C>        <C>
INVESTMENT INCOME:
  Dividends................. $      9   $      7        $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --
  Administrative expense
    fees....................       --         --         --
                                  ---        ---   ---------
    Total expenses..........       --         --         --
                                  ---        ---   ---------
  Net investment income.....        9          7         --
                                  ---        ---   ---------
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --          2         --
  Net realized gain from
    sales on investments....       --         --         --
                                  ---        ---   ---------
    Net realized gain.......       --          2         --
  Net unrealized gain
    (loss)..................        8         35         17
                                  ---        ---   ---------
    Net realized and
     unrealized gain
     (loss).................        8         37         17
                                  ---        ---   ---------
    Net increase in net
     assets from
     operations............. $     17   $     44        $17
                                  ---        ---   ---------
                                  ---        ---   ---------
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-7
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
                                         GROWTH
                                                   (UNAUDITED)
                                                    PERIOD        INVESTMENT GRADE INCOME
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      6   $      5        $ 4   $     15   $14        $11
    Net realized gain.......       58         26         18         --    --         --
    Net unrealized gain
      (loss)................        9         17         17          6    (6)        11
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       73         48         39         21     8         22
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       73         48        239         21     8        222
NET ASSETS:
    Beginning of period.....      287        239         --        230   222         --
                             ---------  ---------  ---------  ---------  ----     -----
    End of period........... $    360   $    287        $239  $    251   $230       $222
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                        MONEY MARKET                         EQUITY INDEX
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $     12   $   11        $  7       $        4   $   5         $ 1
    Net realized gain.......       --       --          --               11       4          16
    Net unrealized gain
      (loss)................       --       --          --               81      45          25
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       12       11           7               96      54          42
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       12       11         207               96      54         242
NET ASSETS:
    Beginning of period.....      218      207          --              296     242          --
                             ---------  -------      -----            -----   ------      -----
    End of period........... $    230   $  218        $207       $      392   $ 296         $242
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-8
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
                                     GOVERNMENT BOND
                                                   (UNAUDITED)
                                                    PERIOD       SELECT AGGRESSIVE GROWTH
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $     13   $     13        $ 9   $     --   $--        $--
    Net realized gain.......       --         --         --         29    21         --
    Net unrealized gain
      (loss)................        3         (5)         7         27    25         49
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       16          8         16         56    46         49
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       16          8        216         56    46        249
NET ASSETS:
    Beginning of period.....      224        216         --        295   249         --
                             ---------  ---------  ---------  ---------  ----     -----
    End of period........... $    240   $    224        $216  $    351   $295       $249
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                       SELECT GROWTH                   SELECT GROWTH AND INCOME
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      1   $    1        $ --       $        4   $   4         $ 2
    Net realized gain.......       20       40          --               31      21          10
    Net unrealized gain
      (loss)................       77       11          36               31      26          30
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       98       52          36               66      51          42
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       98       52         236               66      51         242
NET ASSETS:
    Beginning of period.....      288      236          --              293     242          --
                             ---------  -------      -----            -----   ------      -----
    End of period........... $    386   $  288        $236       $      359   $ 293         $242
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-9
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
                                SELECT VALUE OPPORTUNITY*
                                                   (UNAUDITED)
                                                    PERIOD      SELECT INTERNATIONAL EQUITY
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      2   $      2        $ 2   $      7   $ 5        $ 2
    Net realized gain.......       47         12          5          9     1          1
    Net unrealized gain
      (loss)................       22         49         14         (3)   44         23
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       71         63         21         13    50         26
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       71         63        221         13    50        226
NET ASSETS:
  Beginning of period.......      284        221         --        276   226         --
                             ---------  ---------  ---------  ---------  ----     -----
  End of period............. $    355   $    284        $221  $    289   $276       $226
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                SELECT CAPITAL APPRECIATION            FIDELITY VIP HIGH INCOME
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $     --   $   --        $  5       $       18   $  17         $--
    Net realized gain.......       --        1          --                2       3          --
    Net unrealized gain
      (loss)................       43       23          74               25      11          21
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       43       24          79               45      31          21
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       43       24         279               45      31         221
NET ASSETS:
  Beginning of period.......      303      279          --              252     221          --
                             ---------  -------      -----            -----   ------      -----
  End of period............. $    346   $  303        $279       $      297   $ 252         $221
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
* Name changed. See Note 1.
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                     SA-10
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
                               FIDELITY VIP EQUITY-INCOME
                                                   (UNAUDITED)
                                                    PERIOD          FIDELITY VIP GROWTH
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      4   $     --        $ 4   $      1   $ 1        $--
    Net realized gain.......       24         11         --          9    17         --
    Net unrealized gain
      (loss)................       49         23         37         57    19         49
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       77         34         41         67    37         49
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       77         34        241         67    37        249
NET ASSETS:
  Beginning of period.......      275        241         --        286   249         --
                             ---------  ---------  ---------  ---------  ----     -----
  End of period............. $    352   $    275        $241  $    353   $286       $249
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                   FIDELITY VIP OVERSEAS            FIDELITY VIP II ASSET MANAGER
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      5   $    2        $ --       $        8   $   8         $--
    Net realized gain.......       17        3          --               23       7          --
    Net unrealized gain
      (loss)................        7       23          15               22      18          25
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       29       28          15               53      33          25
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       29       28         215               53      33         225
NET ASSETS:
  Beginning of period.......      243      215          --              258     225          --
                             ---------  -------      -----            -----   ------      -----
  End of period............. $    272   $  243        $215       $      311   $ 258         $225
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                     SA-11
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
 
<TABLE>
<CAPTION>
                                DGPF INTERNATIONAL EQUITY
                                                   (UNAUDITED)
                                                    PERIOD
                                  YEAR ENDED         FROM
                                 DECEMBER 31,      5/1/95**
                             --------------------     TO
                               1997       1996     12/31/95
                             ---------  ---------  ---------
<S>                          <C>        <C>        <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      9   $      7        $--
    Net realized gain.......       --          2         --
    Net unrealized gain
     (loss).................        8         35         17
                             ---------  ---------  ---------
    Net increase in net
     assets from
     operations.............       17         44         17
                             ---------  ---------  ---------
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --
    Terminations............       --         --         --
    Insurance and other
     charges................       --         --         --
    Other transfers from
     (to) the General
     Account of First
      Allmerica Financial
     Life Insurance Company
     (Sponsor)..............       --         --         --
    Net increase in
     investment by First
     Allmerica Financial
      Life Insurance Company
     (Sponsor)..............       --         --        200
                             ---------  ---------  ---------
    Net increase in net
     assets from capital
     transactions...........       --         --        200
                             ---------  ---------  ---------
    Net increase in net
     assets.................       17         44        217
NET ASSETS:
    Beginning of period.....      261        217         --
                             ---------  ---------  ---------
    End of period........... $    278   $    261        $217
                             ---------  ---------  ---------
                             ---------  ---------  ---------
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                     SA-12
<PAGE>
                               GROUP VEL ACCOUNT
 
                         NOTES TO FINANCIAL STATEMENTS
 
NOTE 1 -- ORGANIZATION
 
The Group VEL Account (Group VEL) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company) established on November
13, 1996 (initial investment by the Company occurred on May 1, 1995), for the
purpose of separating from the general assets of the Company those assets used
to fund the variable portion of certain flexible premium variable life policies
issued by the Company. The Company is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Group VEL are clearly identified and distinguished from the other
assets and liabilities of the Company. Group VEL cannot be charged with
liabilities arising out of any other business of the Company.
 
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc. The Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF and INVESCO (the Funds) are open-end, diversified
management investment companies registered under the 1940 Act. INVESCO is
available only to employees of INVESCO and its affiliates.
 
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, the portfolio changed its name to Select Value Opportunity
Fund.
 
Certain prior year balances have been reclassified to conform with current year
presentation.
 
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
 
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, DGPF, or INVESCO. Net realized gains and losses on securities sold
are determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, or INVESCO at net asset value.
 
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return. The Company anticipates no tax liability resulting
from the operations of Group VEL. Therefore, no provision for income taxes has
been charged against Group VEL.
 
                                     SA-13
<PAGE>
                               GROUP VEL ACCOUNT
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3 -- INVESTMENTS
 
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, DGPF and INVESCO at December 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                       PORTFOLIO INFORMATION
                                                   -----------------------------
                                                                       NET ASSET
                                                   NUMBER OF AGGREGATE   VALUE
INVESTMENT PORTFOLIO                                SHARES     COST    PER SHARE
- -------------------------------------------------- --------- --------- ---------
<S>                                                <C>       <C>       <C>
ALLMERICA INVESTMENT TRUST:
  Growth..........................................    149       $316    $ 2.416
  Investment Grade Income.........................    226        240      1.112
  Money Market....................................    230        230      1.000
  Equity Index....................................    142        241      2.753
  Government Bond.................................    229        236      1.047
  Select Aggressive Growth........................    158        249      2.225
  Select Growth...................................    213        263      1.811
  Select Growth and Income........................    231        272      1.552
  Select Value Opportunity*.......................    218        271      1.626
  Select International Equity.....................    215        225      1.341
  Select Capital Appreciation.....................    204        206      1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
  High Income.....................................     22        240     13.580
  Equity-Income...................................     14        243     24.280
  Growth..........................................     10        228     37.100
  Overseas........................................     14        226     19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
  Asset Manager...................................     17        246     18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
  International Stock.............................     --         --         --
DELAWARE GROUP PREMIUM FUND, INC.:
  International Equity............................     18        218     15.520
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
  Industrial Income...............................     --         --         --
  Total Return....................................     --         --         --
</TABLE>
 
* Name changed. See Note 1.
 
NOTE 4 -- RELATED PARTY TRANSACTIONS
 
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of up to $10. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended
 
                                     SA-14
<PAGE>
                               GROUP VEL ACCOUNT
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
 
December 31, 1997, 1996 and 1995, there were no monthly deductions from
sub-account policy values since no policies were issued.
 
The Company makes a charge of up to .90% per annum based on the average daily
net assets of each Sub-Account at each valuation date for mortality and expense
risks. For the years ended December 31, 1997, 1996 and 1995, there were no
mortality and expense risk charges since no policies were issued. The mortality
and expense risks annual charge may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but the total charge may not exceed .90% per
annum. For up to the first 10 policy years, the Company also charges up to .25%
per annum based on the average daily net assets of each Sub-Account for
administrative expenses.
 
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned subsidiary
of the Company, is principal underwriter and general distributor of Group VEL,
and does not receive any compensation for sales of Group VEL policies.
Commissions are paid to registered representatives of Allmerica Investments or
of independent broker-dealers by the Company. As the current series of policies
have a surrender charge, no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1997, 1996 and 1995, there were no
surrender charges applicable to Group VEL.
 
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
 
Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
 
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that Group VEL satisfies the current requirements of
the regulations, and it intends that Group VEL will continue to meet such
requirements.
 
                                     SA-15
<PAGE>
                               GROUP VEL ACCOUNT
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
 
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF and INVESCO shares by Group VEL during the year
ended December 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO                                         PURCHASES SALES
- ------------------------------------------------------------ --------- -----
<S>                                                          <C>       <C>
ALLMERICA INVESTMENT TRUST:
  Growth....................................................    $ 64   $ --
  Investment Grade Income...................................      15     --
  Money Market..............................................      12     --
  Equity Index..............................................      15     --
  Government Bond...........................................      13     --
  Select Aggressive Growth..................................      29     --
  Select Growth.............................................      21     --
  Select Growth and Income..................................      35     --
  Select Value Opportunity*.................................      49     --
  Select International Equity...............................      16     --
  Select Capital Appreciation...............................      --     --
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
  High Income...............................................      20     --
  Equity-Income.............................................      28     --
  Growth....................................................      10     --
  Overseas..................................................      22     --
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
  Asset Manager.............................................      31     --
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
  International Stock.......................................      --     --
DELAWARE GROUP PREMIUM FUND, INC.:
  International Equity......................................       9     --
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
  Industrial Income.........................................      --     --
  Total Return..............................................      --     --
                                                             --------- -----
Total.......................................................    $389   $ --
                                                             --------- -----
                                                             --------- -----
</TABLE>
 
* Name changed. See Note 1.
 
                                     SA-16
<PAGE>
                                          
                  FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                     SUPPLEMENT
                         TO PROSPECTUSES DATED MAY 1, 1998
                                          
                                          
    VEL II Account     Group VEL Account          Inheiritage Account (Variable)
                                          
                                          
The management fee table under the section Investment Advisory Services To The
Trust is amended to change the management fee structure for the Select Growth
Fund as follows:


                      First $250 Million. . . . . . 0.85%
                      Next $250 Million . . . . . . 0.80%
                      Next $250 Million . . . . . . 0.75%
                      Over $750 Million . . . . . . 0.70%

                                        * * * 

                         AMENDMENT TO DIRECTORS AND OFFICERS

Effective May 8, 1998, Robert P. Restrepo, Jr. has joined First Allmerica
Financial Life Insurance Company as a Director and Vice President.  Mr. Restrepo
most recently served as Chief Executive Officer, Personal Lines, for Travelers
Property & Casualty Group, Hartford, Connecticut from 1996 till May, 1998.  He
also previously served at Aetna Life & Casualty Company, Hartford, Connecticut
for over 25 years, most recently as Senior Vice President, Personal Lines,
1994-1996; Senior Vice President, Homeowner's Insurance, 1993-1994; and Vice
President, Sales 1991-1993.  Mr. Restrepo is also a Director of Allmerica
Financial Life Insurance and Annuity Company.

Dated:  June 1, 1998

<PAGE>

   
                             GROUP VEL SEPARATE ACCOUNT
                OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                     SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1998


Effective November 2, 1998, four additional Sub-Accounts will be available under
the Policies.  Each Sub-Account will invest exclusively in shares of a
corresponding investment portfolio:  the Contrafund Portfolio of Fidelity VIP II
("Fidelity VIP II")  the Balanced Portfolio of Fidelity VIP III ("Fidelity VIP
III") ;  the Growth and Income Portfolio and U.S. Government Income Portfolio of
Mutual Fund Variable Annuity Trust ("MVAT"). THE PORTFOLIOS LISTED ABOVE WILL
ONLY BE AVAILABLE TO EMPLOYEES OF BAUSCH & LOMB AND ITS AFFILIATES.

- --------------------------------------------------------------------------------



Under  INVESTMENT OPTIONS- CHARGES OF THE UNDERLYING FUNDS,  the following is
added to the  expenses of the Underlying Funds for 1997 in the Prospectus:

<TABLE>
<CAPTION>
                           MANAGEMENT FEE
                           (AFTER ANY                        TOTAL EXPENSES
                           VOLUNTARY       OTHER FUND          (AFTER ANY
UNDERLYING FUND            WAIVER)          EXPENSES     APPLICABLE LIMITATIONS)
- ---------------            -------         ----------    ----------------------
<S>                        <C>             <C>           <C>
Fidelity VIP II
 Contrafund Portfolio      0.60%           0.08%               0.68% (@)

Fidelity VIP III
 Balanced Portfolio        0.45%           0.15%               0.60% (@)

MVAT Growth and Income
 Portfolio                 0.00%           0.90%               0.90% (+)

MVAT U.S. Government 
Income  Portfolio          0.00%           0.80%               0.80%(+)
</TABLE>
    

<PAGE>

(@) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses.  In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses. 
Including these reductions, the total operating expenses presented in the table
would have been 0.71% for the Fidelity VIP II Contrafund Portfolio and  0.61%
for the Fidelity VIP II Balanced Portfolio.


(+) Reflects current waiver arrangements to maintain Total Annual Expenses at
the levels indicated above.  Absent such waivers, the advisory Fee for the
Growth and Income Portfolio and U.S. Government Income Portfolio would be 0.60%
and 0.50%, respectively.                          
                                          

Under DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS
Section, the following disclosure is added:

MUTUAL FUND VARIABLE ANNUITY TRUST

Mutual Fund Variable Annuity Trust ("MVAT") is an open-end management investment
company organized as a Massachusetts business trust in 1994.  MFVAT was
established to provide a funding medium for certain variable annuity and life
contracts.  Two investment portfolios are available under the Certificates:  the
Growth and Income Portfolio and U.S. Government Income Portfolio.  The Chase
Manhattan Bank, N.A. ("Chase" or the "Adviser") is the investment advisor,
administrator and custodian for the portfolios of MVAT.   THE GROWTH AND INCOME
PORTFOLIO AND U.S. GOVERNMENT INCOME PORTFOLIO ARE AVAILABLE ONLY TO EMPLOYEES
OF BAUSCH & LOMB AND ITS AFFILIATES.


FIDELITY VARIABLE INSURANCE PRODUCTS FUND III

   
Fidelity Variable Insurance Products Fund III ("Fidelity VIP III"), managed by
Fidelity Management & Research Company ("FMR"), is an open-end, diversified,
management investment company organized as a Massachusetts business trust
and is registered with the SEC under the 1940 Act.  One of its investment 
portfolios is available under the Certificates:  the Fidelity VIP III Balanced 
Portfolio.  THIS PORTFOLIO IS AVAILABLE ONLY TO EMPLOYEES OF BAUSCH & LOMB 
AND ITS AFFILIATES.
    
<PAGE>

FIDELITY VARIABLE INSURANCE PRODUCT FUND II

The following investment portfolio has been added and is available under the
Certificates:  The Fidelity VIP II Contrafund Portflio.  THIS PORTFOLIO IS
AVAILABLE ONLY TO EMPLOYEES OF BAUSCH & LOMB AND ITS AFFILIATES.


The following summary of the investment objectives and policies of the
additional four Sub-Accounts are  inserted under the section INVESTMENT
OBJECTIVES AND POLICIES:


THE FOLLOWING FUNDS OF MVAT, FIDELITY VIP II, AND FIDELITY VIP III ARE AVAILABLE
ONLY TO EMPLOYEES OF BAUSCH & LOMB AND ITS AFFILIATES:

MVAT GROWTH AND INCOME PORTFOLIO-seeks to provide long-term capital appreciation
and to provide dividend income primarily through a broad portfolio (i.e. at
least 80% of its assets under normal circumstances) of common stocks.  In
addition, the Portfolio may invest up to 20% of its total assets in convertible
securities.

MVAT U.S. GOVERNMENT INCOME PORTFOLIO-seeks to provide monthly dividends as well
as to protect the value of an investor's investment (i.e. to preserve principal)
by investing at least 65% of its assets in U.S. Treasury obligations,
obligations issued or guaranteed by  U.S. government agencies or
instrumentalities if such are backed by the "full faith and credit" of the U.S.
Treasury, and securities issued or guaranteed as to principal or interest by the
U.S. government or by agencies or instrumentalities thereof.  Neither the United
States nor any of its agencies insures or guarantees the market value of shares
of the Portfolio.

FIDELITY VIP II CONTRAFUND PORTFOLIO-seeks capital appreciation by investing in
securities of companies whose value FMR believes is not fully recognized by the
public.  The fund normally investments primarily in common stock and securities
convertible into common stock, but it has the flexibility to invest in other
types of securities.

FIDELITY VIP III BALANCED PORTFOLIO-seeks both income and growth of capital by
investing in a diversified portfolio of equity and fixed-income securities with
income, growth of income, and capital appreciation potential.

<PAGE>

The  following information is added to the fee disclosures under INVESTMENT
ADVISORY SERVICES:



INVESTMENT ADVISORY SERVICES TO FIDELITY VIP, FIDELITY VIPII AND FIDELITY VIP
III FUNDS

The Fidelity VIP II Contrafund Portfolio and the Fidelity VIP III Balanced
Portfolio fee rates are each made 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
     0.52% and drops as total assets in both mutual funds rise.

1.   An individual Portfolio rate of  0.30% for the Fidelity VIP II Contrafund
     Portfolio and 0.15% for the Fidelity VIP III Balanced 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 II Contrafund Portfolio may have a fee as high as 0.82%
of its average net assets.and the Fidelity VIP III Balanced Portfolio may have a
fee as high as  0.67% of its average net assets.


Under the caption SERVICES the following two portfolios are added:

The Fidelity VIP II Contrafund Portfolio and The Fidelity VIP III Balanced
Portfolio will pay a service fee to First Allmerica Financial Life Insurance
Company (the "Company"), at an annual rate of 0.10% of the aggregate net asset
value, of the shares of such Underlying Funds held by the Separate Account.




   
Dated:  November 2, 1998
    
<PAGE>

   
                                 FINANCIAL STATEMENTS

                   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 June 30,          Six Months Ended June 30,
 (In millions)                                                           1998             1997             1998              1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>             <C>                <C>
 REVENUES
 Premiums                                                            $   581.5         $   578.8       $  1,159.0         $ 1,141.1
 Universal life and investment product policy fees                        72.7              57.1            142.2             113.4
 Net investment income                                                   151.1             165.8            305.1             326.1
 Net realized investment gains                                            16.3              (1.6)            45.5              41.7
 Other income                                                             35.7              28.0             68.3              56.9
                                                                     ---------         ---------       ----------         ---------
   Total revenues                                                        857.3             828.1          1,720.1           1,679.2
                                                                     ---------         ---------       ----------         ---------

 BENEFITS, LOSSES AND EXPENSES
 Policy benefits, claims, losses and loss adjustment expenses            518.2             508.7          1,025.0           1,001.0
 Policy acquisition expenses                                             115.2             116.8            232.4             236.6
 Loss from cession of disability income business                             -                 -                -              53.9
 Other operating expenses                                                133.1             125.9            270.1             255.8
                                                                     ---------         ---------       ----------         ---------
   Total benefits, losses and expenses                                   766.5             751.4          1,527.5           1,547.3
                                                                     ---------         ---------       ----------         ---------
 Income before federal income taxes                                       90.8              76.7            192.6             131.9
                                                                     ---------         ---------       ----------         ---------

 FEDERAL INCOME TAX EXPENSE (BENEFIT)
   Current                                                                14.7              26.6             45.4              33.0
   Deferred                                                                5.8              (7.1)             0.2              (3.5)
                                                                     ---------         ---------       ----------         ---------
 Total federal income tax expense                                         20.5              19.5             45.6              29.5
                                                                     ---------         ---------       ----------         ---------

 Income before minority interest                                          70.3              57.2            147.0             102.4
 Minority interest                                                       (12.0)            (15.2)           (26.6)            (41.2)
                                                                     ---------         ---------       ----------         ---------

 Net income                                                               58.3              42.0            120.4              61.2

 OTHER COMPREHENSIVE INCOME (LOSS)
   Net appreciation on available for sale securities                      13.1             161.5             39.2              26.3
   (Provision) for deferred federal income taxes                          (4.6)            (56.5)           (13.7)             (9.2)
   Minority interest                                                      (3.4)            (33.1)           (11.6)             (6.8)
                                                                     ---------         ---------       ----------         ---------
       Other comprehensive income                                          5.1              71.9             13.9              10.3
                                                                     ---------         ---------       ----------         ---------

 Comprehensive income                                                $    63.4         $   113.9       $    134.3         $    71.5
                                                                     ---------         ---------       ----------         ---------
                                                                     ---------         ---------       ----------         ---------
</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)
                                                                                                           SIX MONTHS ENDED JUNE 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           392.4 
   Lost minority interest on capital transactions                                                             (9.6)              - 
                                                                                                         ---------      ----------
   Balance at end of period                                                                                  444.1           392.4 
                                                                                                         ---------      ----------

RETAINED EARNINGS
   Balance at beginning of period                                                                          1,567.4         1,367.4 
   Net income                                                                                                120.4            61.2 
   Dividends to shareholders                                                                                 (50.0)              - 
                                                                                                         ---------      ----------
   Balance at end of period                                                                                1,637.8         1,428.6 
                                                                                                         ---------      ----------

ACCUMULATED OTHER COMPREHENSIVE INCOME
  NET UNREALIZED APPRECIATION ON INVESTMENTS
   Balance at beginning of period                                                                            209.3           131.4 
   Net appreciation on available for sale securities                                                          39.2            26.3 
   (Provision) for deferred federal income taxes                                                             (13.7)           (9.2)
   Minority interest                                                                                         (11.6)           (6.8) 
                                                                                                         ---------      ----------
       Other comprehensive income                                                                             13.9            10.3 
                                                                                                         ---------      ----------
   Balance at end of period                                                                                  223.2           141.7 
                                                                                                         ---------      ----------

      Total shareholder's equity                                                                         $ 2,310.1      $  1,967.7 
                                                                                                         ---------      ----------
                                                                                                         ---------      ----------
</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)
                                                                                                       JUNE 30,       DECEMBER 31,
(In millions)                                                                                              1998             1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>                <C>
ASSETS
   Investments:
      Fixed maturities at fair value (amortized cost of $7,405.7 and $6,992.8)                      $     7,653.9      $    7,253.5 
      Equity securities at fair value (cost of $386.4 and $341.1)                                           574.0             479.0 
      Mortgage loans                                                                                        555.2             567.5 
      Real estate                                                                                            27.1              50.3 
      Policy loans                                                                                          150.4             141.9 
      Other long term investments                                                                           154.3             148.3 
                                                                                                    -------------      ------------
         Total investments                                                                                9,114.9           8,640.5 
                                                                                                    -------------      ------------
   Cash and cash equivalents                                                                                179.9             213.9 
   Accrued investment income                                                                                143.7             141.8 
   Deferred policy acquisition costs                                                                      1,052.7             965.5 
   Reinsurance receivables:
      Future policy benefits                                                                                327.9             307.1 
      Outstanding claims, losses and loss adjustment expenses                                               628.5             626.7 
      Unearned premiums                                                                                      39.3              32.9 
      Other                                                                                                 107.8              73.6 
                                                                                                    -------------      ------------
        Total reinsurance receivables                                                                     1,103.5           1,040.3 
                                                                                                    -------------      ------------
   Premiums, accounts and notes receivable                                                                  579.9             554.4 
   Other assets                                                                                             381.8             372.9 
   Closed block assets                                                                                      796.4             806.7 
   Separate account assets                                                                               12,260.5           9,755.4 
                                                                                                    -------------      ------------
         Total assets                                                                               $    25,613.3      $   22,491.4 
                                                                                                    -------------      ------------
                                                                                                    -------------      ------------

LIABILITIES
   Policy liabilities and accruals:
      Future policy benefits                                                                        $     2,622.7      $    2,598.6 
      Outstanding claims, losses and loss adjustment expenses                                             2,831.3           2,825.0 
      Unearned premiums                                                                                     854.8             846.8 
      Contractholder deposit funds and other policy liabilities                                           2,436.3           1,852.7 
                                                                                                    -------------      ------------
         Total policy liabilities and accruals                                                            8,745.1           8,123.1 
                                                                                                    -------------      ------------
   Expenses and taxes payable                                                                               624.0             662.6 
   Dividends payable to shareholders                                                                         30.0                 - 
   Reinsurance premiums payable                                                                              58.5              37.7 
   Short term debt                                                                                           10.0              33.0 
   Deferred federal income taxes                                                                             27.5              12.9 
   Long term debt                                                                                               -               2.6 
   Closed block liabilities                                                                                 871.4             885.5 
   Separate account liabilities                                                                          12,255.9           9,749.7 
                                                                                                    -------------      ------------
      Total liabilities                                                                                  22,622.4          19,507.1 
                                                                                                    -------------      ------------
      Minority interest                                                                                     680.8             748.9 
      Committments 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                                                                   223.2             209.3 
   Retained earnings                                                                                      1,637.8           1,567.4 
                                                                                                    -------------      ------------
      Total shareholder's equity                                                                          2,310.1           2,235.4 
                                                                                                    -------------      ------------
      Total liabilities and shareholder's equity                                                    $    25,613.3      $   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)
                                                                                                        SIX MONTHS ENDED
                                                                                                   JUNE 30,            JUNE 30,
(In millions)                                                                                        1998                1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                                  $    120.4            $    61.2
   Adjustments to reconcile net income to net cash provided by (used in) operating
   activities:
      Minority interest                                                                              26.6                 41.2
      Net realized (gains)                                                                          (47.2)               (42.7)
      Net amortization and depreciation                                                              14.6                 13.7
      Deferred federal income taxes                                                                   0.2                 (3.5)
      Change in deferred acquisition costs                                                          (86.8)               (63.9)
      Change in premiums and notes receivable, net of reinsurance                                    (3.9)                 2.9
      Change in accrued investment income                                                            (1.8)                 0.3
      Change in policy liabilities and accruals, net                                                 23.7                (71.1)
      Change in reinsurance receivable                                                              (63.3)                20.3
      Change in expenses and taxes payable                                                          (32.4)               (47.5)
      Separate account activity, net                                                                  1.1                  0.3
      Loss from cession of disability income business                                                   -                 53.9
      Other, net                                                                                      4.2                  5.4
                                                                                               ----------            ---------
         Net cash (used in) provided by operating activities                                        (44.6)               (29.5)
                                                                                               ----------            ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from disposals and maturities of available-for-sale fixed maturities                  1,240.3              1,468.1
   Proceeds from disposals of equity securities                                                      61.1                121.0
   Proceeds from disposals of other investments                                                      49.9                 43.0
   Proceeds from mortgages matured or collected                                                      92.2                107.9
   Purchase of available-for-sale fixed maturities                                               (1,648.5)            (1,364.2)
   Purchase of equity securities                                                                    (90.6)               (22.0)
   Purchase of other investments                                                                   (118.5)               (70.6)
   Capital expenditures                                                                              (3.3)                (2.8)
   Other investing activities                                                                        (3.9)                 0.5
                                                                                               ----------            ---------
      Net cash (used in) provided by investing activities                                          (421.3)               280.9
                                                                                               ----------            ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Deposits and interest credited to contractholder deposit funds                                   844.9                125.4
   Withdrawals from contractholder deposit funds                                                   (259.4)              (302.1)
   Change in short term debt                                                                        (23.0)                (4.0)
   Change in long term debt                                                                          (2.6)                   -
   Dividends paid to shareholders                                                                   (20.0)                (2.4)
   Purchase of Minority Interest                                                                   (125.0)                   -
                                                                                               ----------            ---------
      Net cash provided by (used in) financing activities                                           414.9               (183.1)
                                                                                               ----------            ---------
Net change in cash and cash equivalents                                                             (51.0)                68.3
Net change in cash held in the Closed Block                                                          17.0                  5.9
Cash and cash equivalents, beginning of period                                                      213.9                175.9
                                                                                               ----------            ---------
Cash and cash equivalents, end of period                                                       $    179.9            $   250.1
                                                                                               ----------            ---------
                                                                                               ----------            ---------
</TABLE>

              The accompanying notes are an integral part of these
                    consolidated financial statements.

    


                                         UF-4
<PAGE>

   
                   FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                  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 June 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 second quarter and six month
period ended June 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 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.

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 second quarter and six months
ended June 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 No. 98-1"). SOP No. 98-1 requires
that certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use.  This statement is effective for fiscal years
beginning after December 15, 1998.  In the second quarter, the Company adopted
SOP No. 98-1 effective January 1, 1998, resulting an increase in pre-tax income
of $6.2 million.  The adoption of SOP No. 98-1 had no material effect on the
results of operations or financial position for the three months ended March 31,
1998.

In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SOP 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.
    


                                         UF-5
<PAGE>

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

In 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 has 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.

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.

5. Federal Income Taxes

Federal income tax expense for the periods ended June 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.
    


                                         UF-6
<PAGE>

   
6. Closed Block

Included in other income in the Consolidated Statements of Income is a net
pre-tax contribution from the Closed Block of $3.6 million and $6.0 million for
the second quarter and six months ended June 30, 1998 respectively, compared to
$0.5 million and $6.0 million for the second quarter and six months ended June
30, 1997, respectively.  Summarized financial information of the Closed Block is
as follows:

<TABLE>
<CAPTION>
                                                                            (UNAUDITED)
 (In millions)                                                                 JUNE 30,    DECEMBER 31,
                                                                                 1998           1997
- -------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>
  ASSETS
    Fixed maturities-at fair value (amortized cost of $403.0 and $400.1)    $    416.0   $    412.9 
    Mortgage loans                                                               124.9        112.0 
    Policy loans                                                                 214.1        218.8 
    Cash and cash equivalents                                                      8.1         25.1 
    Accrued investment income                                                     14.1         14.1 
    Deferred policy acquisition costs                                             16.5         18.2 
    Other assets                                                                   2.7          5.6 
                                                                            ----------    ---------
          Total assets                                                      $    796.4    $   806.7
                                                                            ----------    ---------
                                                                            ----------    ---------
 LIABILITIES
    Policy liabilities and accruals                                         $    861.3    $   875.1
    Other liabilities                                                             10.1         10.4 
                                                                            ----------    ---------
          Total liabilities                                                 $    871.4    $   885.5 
                                                                            ----------    ---------
                                                                            ----------    ---------

<CAPTION>

                                                                                   (UNAUDITED)                  (UNAUDITED)
                                                                                     QUARTER                    SIX MONTHS 
                                                                                      ENDED                        ENDED
                                                                                     JUNE 30,                     JUNE 30,
                                                                            -----------------------      ---------------------------
 (In millions)                                                                   1998          1997           1998           1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>           <C>            <C>            <C>
 REVENUES
    Premiums                                                                $      9.0    $     9.7      $    37.2      $    39.0
    Net investment income                                                         13.2         13.2           26.4           26.7
    Net realized investment gains                                                  1.6          0.1            1.6            1.0
                                                                            ----------    ---------      ---------      ---------
       Total revenues                                                             23.8         23.0           65.2           66.7
                                                                            ----------    ---------      ---------      ---------

 BENEFITS AND EXPENSES
    Policy benefits                                                               19.7         21.8           57.4           59.1
    Policy acquisition expenses                                                    0.6          0.5            1.3            1.4
    Other operating expenses                                                      (0.1)         0.2            0.5            0.2
                                                                            ----------    ---------      ---------      ---------
       Total benefits and expenses                                                20.2         22.5           59.2           60.7
                                                                            ----------    ---------      ---------      ---------

          Contribution from the Closed Block                                $      3.6    $     0.5      $     6.0      $     6.0
                                                                            ----------    ---------      ---------      ---------
                                                                            ----------    ---------      ---------      ---------
</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.  

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 
    


                                         UF-7
<PAGE>

   
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-8
<PAGE>

   

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

<TABLE>
<CAPTION>
                                                                          (Unaudited)                         (Unaudited)
                                                                         Quarter Ended                     Six Months Ended
                                                                             June 30,                          June 30,
   (In millions)                                                   1998                1997                1998              1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                 <C>               <C>
 Segment revenues
       Risk Management
           Property and Casualty                              $      555.9       $       553.1       $     1,109.4     $   1,089.0 
           Corporate Risk Management Services                        102.8               102.9               207.8           198.7 
                                                              ------------       -------------       -------------     -----------
                Subtotal                                             658.7               656.0             1,317.2         1,287.7 
                                                              ------------       -------------       -------------     -----------
        Retirement and Asset Accumulation
            Allmerica Financial Services                             172.4               175.0               363.6           366.2 
            Allmerica Asset Management                                29.9                23.6                53.8            47.5 
                                                              ------------       -------------       -------------     -----------
                 Subtotal                                            202.3               198.6               417.4           413.7 
                                                              ------------       -------------       -------------     -----------
        Corporate                                                      5.2                  .9                 6.2             1.9 
        Intersegment revenues                                         (2.0)               (3.5)               (4.1)           (6.0)
                                                              ------------       -------------       -------------     -----------
            Total segment revenues including Closed Block            864.2               852.0             1,736.7         1,697.3 
                 Adjustment for Closed Block                         (18.7)              (22.2)              (57.6)          (59.7)
                 Net realized gains (losses)                          11.8                (1.7)               41.0            41.6 
                                                              ------------       -------------       -------------     -----------

            Total revenues                                    $      857.3       $       828.1       $     1,720.1     $   1,679.2 
                                                              ------------       -------------       -------------     -----------
                                                              ------------       -------------       -------------     -----------

 Segment income (loss) before income taxes and minority
 interest:
        Risk Management
            Property and Casualty                             $       36.8       $        45.4       $        74.5     $      83.1 
            Corporate Risk Management Services                         1.4                 6.5                 6.6             9.9 
                                                              ------------       -------------       -------------     -----------
                 Subtotal                                             38.2                51.9                81.1            93.0 
                                                              ------------       -------------       -------------     -----------
         Retirement and Asset Accumulation
             Allmerica Financial Services                             43.6                32.0                85.3            61.8 
             Allmerica Asset Management                                6.2                 5.4                10.1             8.6 
                                                              ------------       -------------       -------------     -----------
                  Subtotal                                            49.8                37.4                95.4            70.4 
                                                              ------------       -------------       -------------     -----------
          Corporate                                                  (13.8)               (7.4)              (23.7)          (17.3)
                                                              ------------       -------------       -------------     -----------
              Segment income before income taxes and          
             minority interest                                        74.2                81.9               152.8           146.1 
 Adjustments to segment income:
          Net realized investment gains, net of amortization          16.7                (1.8)               40.6            42.2 
          Loss on cession of disability income business                  -                   -                   -           (53.9)
          Other items                                                  (.1)               (3.3)                (.8)           (2.5)
                                                              ------------       -------------       -------------     -----------
 Income before taxes and minority interest                    $       90.8       $        76.8       $       192.6     $     131.9 
                                                              ------------       -------------       -------------     -----------
                                                              ------------       -------------       -------------     -----------
</TABLE>
    


                                         UF-9
<PAGE>

   
<TABLE>
<CAPTION>
                                                             IDENTIFIABLE ASSETS                   DEFERRED ACQUISITION COSTS
- ------------------------------------------------------------------------------------------------------------------------------------
                                                     (UNAUDITED)                               (UNAUDITED) 
                                                       JUNE 30,            DECEMBER 31,          JUNE 30,          DECEMBER 31,
  (In millions)                                          1998                  1997                1998                1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                 <C>                     <C>                 <C>
  Risk Management
    Property and Casualty. . . . . . . . . . . .   $    5,538.8        $      5,650.4          $     163.5            $    167.2
    Corporate Risk Management Services . . . . .          635.8                 619.8                  2.9                   2.9
       Subtotal  . . . . . . . . . . . . . . . .        6,174.6               6,270.2                166.4                 170.1
                                                   ------------        --------------          -----------            ----------
  Retirement and Asset Accumulation
    Allmerica Financial Services . . . . . . . .       17,743.3              15,159.2                885.5                 794.5
    Allmerica Asset Management . . . . . . . . .        1,651.3               1,035.1                   .8                   0.9
                                                   ------------        --------------          -----------            ----------
       Subtotal  . . . . . . . . . . . . . . . .       19,394.6              16,194.3                886.3                 795.4
  Corporate. . . . . . . . . . . . . . . . . . .           44.1                  26.9                    -                     -
                                                   ------------        --------------          -----------            ----------
    Total. . . . . . . . . . . . . . . . . . . .   $   25,613.3        $     22,491.4          $   1,052.7            $    965.5
                                                   ------------        --------------          -----------            ----------
</TABLE>

8. Commitments and Contingencies

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.

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-10
<PAGE>

   
                                    BALANCE SHEET


                                  GROUP VEL ACCOUNT
     
                         STATEMENTS OF ASSETS AND LIABILITIES
                                     (UNAUDITED)
                                 SEPTEMBER 30, 1998
     
<TABLE>
<CAPTION>
                                                                                 INVESTMENT                                     
                                                                                    GRADE      MONEY        EQUITY     GOVERNMENT
                                                                       GROWTH      INCOME      MARKET       INDEX          BOND  
                                                                    ---------    ---------    ---------    ---------    ---------
<S>                                                                 <C>          <C>          <C>          <C>          <C>
ASSETS :                                                             
Investments in shares of Allmerica Investment Trust  . . . . . . .  $     353    $     271    $     239    $     415    $     258
Investments in shares of Fidelity Variable Insurance
  Products Funds . . . . . . . . . . . . . . . . . . . . . . . . .          -            -            -            -            -
Investment in shares of T. Rowe Price International
  Series, Inc.   . . . . . . . . . . . . . . . . . . . . . . . . .          -            -            -            -            -
Investment in shares of Delaware Group Premium Fund, Inc.  . . . .          -            -            -            -            -
Investments in shares of INVESCO Variable Investment Funds, Inc. .          -            -            -            -            -
                                                                    ---------    ---------    ---------    ---------    ---------
  Total  assets  . . . . . . . . . . . . . . . . . . . . . . . . .        353          271          239          415          258

LIABILITIES:                                                                -            -            -            -            -
                                                                    ---------    ---------    ---------    ---------    ---------
  Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . .  $     353    $     271    $     239    $     415    $     258
                                                                    ---------    ---------    ---------    ---------    ---------
                                                                    ---------    ---------    ---------    ---------    ---------

Net asset distribution by category:          
  Variable life policies   . . . . . . . . . . . . . . . . . . . .  $       -    $       -    $       -    $       -    $       -
  Value of investments by First Allmerica Financial Life Insurance 
    Company (Sponsor)  . . . . . . . . . . . . . . . . . . . . . .        353          271          239          415          258
                                                                    ---------    ---------    ---------    ---------    ---------
                                                                    $     353    $     271    $     239    $     415    $     258
                                                                    ---------    ---------    ---------    ---------    ---------
                                                                    ---------    ---------    ---------    ---------    ---------

Units outstanding . . . . . . . . . . . . . . . . . . . . . . . . .       200          200          200          200          200
Net asset value per unit . . . . . . . . . . . . . . .  . . . . . . $1.766571    $1.353405    $1.195309    $2.072812    $1.289701

<CAPTION>

                                                                      SELECT                  SELECT     SELECT         SELECT
                                                                    AGGRESSIVE    SELECT      GROWTH      VALUE     INTERNATIONAL
                                                                      GROWTH      GROWTH    AND INCOME   OPPORTUNITY*    EQUITY 
                                                                    -----------  ---------  ----------   ----------- ------------
<S>                                                                  <C>         <C>        <C>          <C>         <C>     
ASSETS :                                                                                                                  
Investments in shares of Allmerica Investment Trust  . . . . . . .   $     315  $     418    $     350   $      328    $     281
Investments in shares of Fidelity Variable Insurance
  Products Funds . . . . . . . . . . . . . . . . . . . . . . . . .           -          -            -            -            -
Investment in shares of T. Rowe Price International
  Series, Inc.   . . . . . . . . . . . . . . . . . . . . . . . . .           -          -            -            -            -
Investment in shares of Delaware Group Premium Fund, Inc.  . . . .           -          -            -            -            -
Investments in shares of INVESCO Variable Investment Funds, Inc. .           -          -            -            -            -
                                                                     ---------  ---------    ---------    ---------    ---------
  Total  assets  . . . . . . . . . . . . . . . . . . . . . . . . .         315        418          350          328          281

LIABILITIES:                                                                 -          -            -            -            -
                                                                     ---------  ---------    ---------    ---------    ---------
  Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . .   $     315  $     418    $     350    $     328    $     281
                                                                     ---------  ---------    ---------    ---------    ---------
                                                                     ---------  ---------    ---------    ---------    ---------

Net asset distribution by category:                                                                                      
  Variable life policies   . . . . . . . . . . . . . . . . . . . .   $       -  $       -    $       -    $       -    $       -
  Value of investments by First Allmerica Financial Life Insurance                                                       
    Company (Sponsor)  . . . . . . . . . . . . . . . . . . . . . .         315        418          350          328          281
                                                                     ---------  ---------    ---------    ---------    ---------
                                                                     $     315  $     418    $     350    $     328    $     281
                                                                     ---------  ---------    ---------    ---------    ---------
                                                                     ---------  ---------    ---------    ---------    ---------

Units outstanding . . . . . . . . . . . . . . . . . . . . . . . . .        200        200          200          200          200
Net asset value per unit . . . . . . . . . . . . . . .  . . . . . .  $1.573938  $2.089739    $1.748209    $1.640789    $1.406327
</TABLE>


*  Name changed.  See Note 1.      

   The accompanying notes are an integral part of these financial statements.
    


                                     SA-1
<PAGE>

   
                                    BALANCE SHEET


                               GROUP VEL ACCOUNT

               STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
                                  (UNAUDITED)
                               SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                              SELECT         FIDELITY       FIDELITY        FIDELITY      FIDELITY
                                                              CAPITAL           VIP            VIP            VIP           VIP
                                                            APPRECIATION    HIGH INCOME   EQUITY-INCOME      GROWTH       OVERSEAS
                                                           -------------   -------------  -------------   ------------  ------------
<S>                                                        <C>             <C>            <C>             <C>           <C>
ASSETS:
Investments in shares of Allmerica  Investment Trust. .    $         308   $           -  $           -   $          -  $          -
Investments in shares of Fidelity Variable Insurance
  Products Funds. . . . . . . . . . . . . . . . . . . .                -             272            340            396           259
Investment in shares of T. Rowe Price International
  Series, Inc.. . . . . . . . . . . . . . . . . . . . .                -               -              -              -             -
Investment in shares of Delaware Group Premium  
  Fund, Inc.. . . . . . . . . . . . . . . . . . . . . .                -               -              -              -             -
Investments in shares of INVESCO Variable Investment 
  Funds, Inc. . . . . . . . . . . . . . . . . . . . . .                -               -              -              -             -
                                                           -------------   -------------  -------------   ------------  ------------
   Total assets . . . . . . . . . . . . . . . . . . . .              308             272            340            396           259

LIABILITIES:                                                           -               -              -              -             -
                                                          --------------   -------------  -------------   ------------  ------------
   Net assets . . . . . . . . . . . . . . . . . . . . .   $          308   $         272  $         340   $        396  $        259
                                                          --------------   -------------  -------------   ------------  ------------
                                                          --------------   -------------  -------------   ------------  ------------


Net asset distribution by category:
    Variable life policies. . . . . . . . . . . . . . .   $            -   $           -  $           -   $          -  $          -
    Value of investments by First Allmerica Financial
      Life Insurance Company (Sponsor). . . . . . . . .              308             272            340            396           259
                                                          --------------   -------------  -------------   ------------  ------------
                                                          $          308   $         272  $         340   $        396  $        259
                                                          --------------   -------------  -------------   ------------  ------------
                                                          --------------   -------------  -------------   ------------  ------------

    Units outstanding . . . . . . . . . . . . . . . . .              200             200            200            200           200

    Net asset value per unit. . . . . . . . . . . . . .       $ 1.541959      $ 1.357594     $ 1.701626     $ 1.980787    $ 1.296389

<CAPTION>

                                                              FIDELITY     T. ROWE PRICE      DGPF          INVESCO       INVESCO
                                                               VIP II      INTERNATIONAL  INTERNATIONAL    INDUSTRIAL      TOTAL
                                                           ASSET MANAGER     STOCK (a)       EQUITY        INCOME (a)    RETURN (a)
                                                          ---------------  -------------  -------------   ------------  ------------
<S>                                                       <C>              <C>            <C>             <C>           <C>
ASSETS:
Investments in shares of Allmerica  Investment Trust. .   $             -  $           -  $           -   $          -  $          -
Investments in shares of Fidelity Variable Insurance
  Products Funds. . . . . . . . . . . . . . . . . . . .               317              -              -              -             -
Investment in shares of T. Rowe Price International     
  Series, Inc.. . . . . . . . . . . . . . . . . . . . .                 -              -              -              -             -
Investment in shares of Delaware Group Premium          
  Fund, Inc.. . . . . . . . . . . . . . . . . . . . . .                 -              -            268              -             -
Investments in shares of INVESCO Variable Investment    
  Funds, Inc. . . . . . . . . . . . . . . . . . . . . .                 -              -              -              -             -
                                                          ---------------  -------------  -------------   ------------  ------------
   Total assets . . . . . . . . . . . . . . . . . . . .               317  $           -  $         268   $          -  $          -

LIABILITIES:                                                            -              -              -              -             -

   Net assets . . . . . . . . . . . . . . . . . . . . .   $           317  $           -  $         268   $          -  $          -
                                                          ---------------  -------------  -------------   ------------  ------------
                                                          ---------------  -------------  -------------   ------------  ------------

Net asset distribution by category:                     
    Variable life policies. . . . . . . . . . . . . . .   $             -  $           -  $           -   $          -  $          -
    Value of investments by First Allmerica Financial
      Life Insurance Company (Sponsor). . . . . . . . .               317              -            268              -             -
                                                          ---------------  -------------  -------------   ------------  ------------
                                                          $           317  $           -  $         268   $          -  $          -
                                                          ---------------  -------------  -------------   ------------  ------------
                                                          ---------------  -------------  -------------   ------------  ------------

    Units outstanding . . . . . . . . . . . . . . . . .               200              0            200              0             0

    Net asset value per unit. . . . . . . . . . . . . .        $ 1.586257     $ 1.000000     $ 1.342082     $ 1.000000    $ 1.000000
</TABLE>


(a) For the period ended September 30, 1998, there were no transactions.

  The accompanying notes are an integral part of these financial statements.
    


                                     SA-2
<PAGE>>

   
                                     OPS


                             GROUP VEL ACCOUNT

                         STATEMENTS OF OPERATIONS
                                (UNAUDITED)
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998


<TABLE>
<CAPTION>
                                                                            INVESTMENT                                            
                                                                              GRADE       MONEY       EQUITY      GOVERNMENT  
                                                                   GROWTH     INCOME      MARKET      INDEX           BOND       
                                                                   ------   ----------   -------   ---------      ----------
<S>                                                              <C>        <C>          <C>       <C>          <C>
INVESTMENT INCOME:
  Dividends  . . . . . . . . . . . . . . . . . . . . . .         $        3  $      12   $      9  $       4    $        10  


EXPENSES:
  Mortality and expense risk fees  . . . . . . . . . . .                  -           -         -           -             -
  Administrative expense fees    . . . . . . . . . . . .                  -           -         -           -             -
                                                                 ----------  ----------  --------  ----------   -----------
    Total expenses . . . . . . . . . . . . . . . . . . .                  -           -         -           -             -
                                                                 ----------  ----------  --------  ----------   -----------

  Net investment income  . . . . . . . . . . . . . . . .                  3          12         9           4            10
                                                                 ----------  ----------  --------  ----------   -----------


REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
  Realized gain distributions from portfolio sponsors. .                  4           -         -           1             -
  Net realized gain from sales of investments  . . . . .                  -           -         -           -             -
                                                                 ----------  ----------  --------  ----------   -----------
    Net realized gain . . . . . . . . . . . . .  . . . .                  4           -         -           1             -
  Net unrealized gain (loss) . . . . . . . . . . . . . .                (14)          8         -          18             8
                                                                 ----------  ----------  --------  ----------   -----------

    Net realized and unrealized  gain (loss) . . . . . .                (10)          8         -          19             8
                                                                 ----------  ----------  --------  ----------   -----------
    Net increase (decrease) in net assets from 
      operations . . . . . . . . . . . . . . . . . . . .         $       (7) $       20  $      9  $       23   $        18  
                                                                 ----------  ----------  --------  ----------   -----------
                                                                 ----------  ----------  --------  ----------   -----------


<CAPTION>
                                                                   SELECT                 SELECT        SELECT         SELECT
                                                                 AGGRESSIVE   SELECT      GROWTH        VALUE       INTERNATIONAL 
                                                                  GROWTH      GROWTH    AND INCOME  OPPORTUNITY*      EQUITY   
                                                                 ----------  ---------- ----------  ------------    -------------
<S>                                                              <C>         <C>        <C>         <C>             <C>
INVESTMENT INCOME:                                                                                                                
  Dividends  . . . . . . . . . . . . . . . . . . . . . .         $        -  $        0 $        3  $          0    $           2 
                                                                                                                                   
                                                                                                                                   
EXPENSES:                                                                                                                          
  Mortality and expense risk fees  . . . . . . . . . . .                  -           -          -             -                -  
  Administrative expense fees    . . . . . . . . . . . .                  -           -          -             -                -  
                                                                 ----------  ---------- ----------  ------------    -------------
    Total expenses . . . . . . . . . . . . . . . . . . .                  -           -          -             -                -  
                                                                 ----------  ---------- ----------  ------------    -------------
                                                                 
  Net investment income  . . . . . . . . . . . . . . . .                  -           0          3             0                2
                                                                 ----------  ---------- ----------  ------------    -------------

                                                                                                                                 
                                                                          
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                      
  Realized gain distributions from portfolio sponsors. .                  -           4          1             1                -
  Net realized gain from sales of investments  . . . . .                  -           -          -             -                -
                                                                 ----------  ---------- ----------  ------------    -------------
    Net realized gain . . . . . . . . . . . . .  . . . .                  -           4          1             1                -
  Net unrealized gain (loss) . . . . . . . . . . . . . .                (36)         28        (14)          (28)             (10)
                                                                 ----------  ---------- ----------  ------------    -------------

    Net realized and unrealized  gain (loss) . . . . . .                (36)         32        (12)          (27)             (10)
                                                                 ----------  ---------- ----------  ------------    -------------
    Net increase (decrease) in net assets from          
      operations . . . . . . . . . . . . . . . . . . . .         $      (36) $       32 $       (9) $        (27)   $          (8)
                                                                 ----------  ---------- ----------  ------------    -------------
                                                                 ----------  ---------- ----------  ------------    -------------
</TABLE>


*  Name changed.  See Note 1.

  The accompanying notes are an integral part of these financial statements.
    


                                       SA-3
<PAGE>

   
                                      OPS

                              GROUP VEL ACCOUNT

                     STATEMENTS OF OPERATIONS (CONTINUED)
                                (UNAUDITED)
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998


<TABLE>
<CAPTION>
                                                                   SELECT      FIDELITY      FIDELITY     FIDELITY    FIDELITY
                                                                  CAPITAL         VIP          VIP          VIP         VIP   
                                                                 APPRECIATION HIGH INCOME  EQUITY-INCOME  GROWTH      OVERSEAS
                                                                 ------------ ------------ -------------  --------    ---------
<S>                                                              <C>          <C>          <C>            <C>         <C>       
INVESTMENT INCOME:                                      
 Dividends  . . . . . . . . . . . . . . . . . . . . . .          $          - $         21  $           5  $      2    $       5

                                                        
EXPENSES:                                               
  Mortality and expense risk fees  . . . . . . . . . . .                    -            -             -         -            -
  Administrative expense fees    . . . . . . . . . . . .                    -            -             -         -            -
                                                                 ------------ ------------  ------------  --------    ---------
    Total expenses . . . . . . . . . . . . . . . . . . .                    -            -             -         -            -
                                                                 ------------ ------------  ------------  --------    ---------

                                                        
  Net investment income  . . . . . . . . . . . . . . . .                    -           21             5         2            5
                                                                 ------------ ------------  ------------  --------    ---------
                                                        
                                                        
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:   
  Realized gain distributions from portfolio sponsors. .                    -           13            18        47           16
  Net realized gain from sales of investments  . . . . .                    -            -             -         -            -
                                                                 ------------ ------------  ------------  --------    ---------
    Net realized gain . . . . . . . . . . . . .  . . . .                    -           13            18        47           16
  Net unrealized gain (loss) . . . . . . . . . . . . . .                  (36)         (60)          (94)       (6)         (33)
                                                                 ------------ ------------  ------------  --------    ---------
    Net realized and unrealized  gain (loss) . . . . . .                  (38)         (46)          (17)       41          (18)
                                                                 ------------ ------------  ------------  --------    ---------
    Net increase (decrease) in net assets from          
      operations . . . . . . . . . . . . . . . . . . . .         $        (38)$        (25) $        (12) $     43    $     (13)
                                                                 ------------ ------------  ------------  --------    ---------
                                                                 ------------ ------------  ------------  --------    --------- 

<CAPTION>

                                                                  FIDELITY    T. ROWE PRICE    DGPF         INVESCO     INVESCO
                                                                   VIP II     INTERNATIONAL INTERNATIONAL  INDUSTRIAL     TOTAL    
                                                                ASSET MANAGER   STOCK (A)     EQUITY       INCOME(A)   RETURN(A)
                                                                ------------- ------------  -------------  ----------  ---------
<S>                                                             <C>           <C>           <C>            <C>         <C>        
INVESTMENT INCOME:                                                                                                               
  Dividends  . . . . . . . . . . . . . . . . . . . . . .        $          10 $          -  $         11   $        -  $       -  
                                                                                                                                 
                                                                                                                                 
EXPENSES:                                                                                                                        
  Mortality and expense risk fees  . . . . . . . . . . .                    -            -             -            -          -  
  Administrative expense fees    . . . . . . . . . . . .                    -            -             -            -          -  
                                                                ------------- ------------  ------------   ----------  ---------
    Total expenses . . . . . . . . . . . . . . . . . . .                    -            -             -            -          -  
                                                                ------------- ------------  ------------   ----------  ---------
                                                                                                                                 
  Net investment income  . . . . . . . . . . . . . . . .                                                                         
                                                                           10            -            11            -          -
                                                                ------------- ------------  ------------   ----------  ---------
                                                                                                                                 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:                                                                            
  Realized gain distributions from portfolio sponsors. .                   30            -             -            -          -
  Net realized gain from sales of investments  . . . . .                    -            -             -            -          -
                                                                ------------- ------------  ------------   ----------  ---------
    Net realized gain . . . . . . . . . . . . .  . . . .                   30            -             -            -          -
  Net unrealized gain (loss) . . . . . . . . . . . . . .                  (33)           -           (21)           -          -
                                                                ------------- ------------  -------------  ----------  ---------

    Net realized and unrealized  gain (loss) . . . . . .                   (4)           -           (21)           -          -
                                                                ------------- ------------  -------------  ----------  ---------
    Net increase (decrease) in net assets from                                                                                   
      operations . . . . . . . . . . . . . . . . . . . .        $           6 $          -  $        (10)  $        -  $       - 
                                                                ------------- ------------  -------------  ----------  ---------
                                                                ------------- ------------  -------------  ----------  ---------
</TABLE>


(a) For the period ended September 30, 1998, there were no transactions.

  The accompanying notes are an integral part of these financial statements.
    


                                     SA-4
<PAGE>
   
                                       CNA

                               GROUP VEL ACCOUNT   
      
                     STATEMENTS OF CHANGES IN NET ASSETS     

                                  (UNAUDITED)    
                      NINE MONTHS ENDED SEPTEMBER 30, 1998  

<TABLE>
<CAPTION>
                                                                                 INVESTMENT                                     
                                                                                    GRADE      MONEY     EQUITY    GOVERNMENT
                                                                         GROWTH    INCOME     MARKET      INDEX       BOND 
                                                                       ----------  ------    --------   --------  ------------
<S>                                                                     <C>      <C>          <C>       <C>       <C>           
INCREASE IN NET ASSETS :                                                                                                        
 FROM OPERATIONS:                                                                                                               
  Net investment income. . . . . . . . . . . . . . . . . . . . . . . .  $    3    $    12     $   9     $    4      $     9     
  Net realized gain on investments . . . . . . . . . . . . . . . . . .       4          -         -          1            -     
  Net unrealized gain (loss) on investments. . . . . . . . . . . . . .     (14)         8         -         18            9     
                                                                        ------    -------     -----     ------      -------
  Net increase in net assets from operations . . . . . . . . . . . . .      (7)        20         9         23           18     
                                                                        ------    -------     -----     ------      -------
 FROM CAPITAL TRANSACTIONS :                                                                                                    
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -          -         -          -            -     
  Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -          -         -          -            -     
  Insurance and other charges. . . . . . . . . . . . . . . . . . . . .       -          -         -          -            -     
  Other transfers from (to) the General Account of First Allmerica                                                              
   Financial Life Insurance Company (Sponsor). . . . . . . . . . . . .       -          -         -          -            -     
  Net increase in investments by First Allmerica Financial                                                                      
   Life Insurance Company (Sponsor). . . . . . . . . . . . . . . . . .       -          -         -          -            -     
                                                                        ------    -------     -----     ------      -------
  Net increase in net assets from capital transactions . . . . . . . .       -          -         -          -            -     
                                                                        ------    -------     -----     ------      -------
                                                                                                                                
  Net increase (decrease) in net assets. . . . . . . . . . . . . . . .      (7)        20         9         23           18     
                                                                                                                                
NET ASSETS:                                                                                                                     
 Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .     360        251       230        392          240     
                                                                        ------    -------     -----     ------      -------
 End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  353    $   271     $ 239     $  415      $   258     
                                                                        ------    -------     -----     ------      -------
                                                                        ------    -------     -----     ------      -------

<CAPTION>

                                                                        SELECT                 SELECT       SELECT         SELECT   
                                                                      AGGRESSIVE    SELECT     GROWTH        VALUE     INTERNATIONAL
                                                                        GROWTH      GROWTH   AND INCOME   OPPORTUNITY*     EQUITY   
                                                                       ----------    ------  -----------  ------------ ------------
<S>                                                                    <C>           <C>      <C>          <C>           <C>        
INCREASE IN NET ASSETS :                                                                                                            
 FROM OPERATIONS:                                                                                                                   
  Net investment income. . . . . . . . . . . . . . . . . . . . . . . .  $    -       $   -     $   3        $   -          $   2    
  Net realized gain on investments . . . . . . . . . . . . . . . . . .       -           4         1            1              -
  Net unrealized gain (loss) on investments. . . . . . . . . . . . . .     (36)         28       (13)         (28)           (10)
                                                                        ------       -----     -----        -----          -----
  Net increase in net assets from operations . . . . . . . . . . . . .     (36)         32        (9)         (27)            (8)
                                                                        ------       -----     -----        -----          -----
 FROM CAPITAL TRANSACTIONS :                                                                                                    
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -           -         -            -              -
  Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . .       -           -         -            -              -
  Insurance and other charges. . . . . . . . . . . . . . . . . . . . .       -           -         -            -              -
  Other transfers from (to) the General Account of First Allmerica                                                              
   Financial Life Insurance Company (Sponsor). . . . . . . . . . . . .       -           -         -            -              -
  Net increase in investments by First Allmerica Financial                                                                      
   Life Insurance Company (Sponsor). . . . . . . . . . . . . . . . . .       -           -         -            -              -
                                                                        ------       -----     -----        -----          -----
  Net increase in net assets from capital transactions . . . . . . . .       -           -         -            -              -
                                                                        ------       -----     -----        -----          -----
                                                                                                                                 
  Net increase (decrease) in net assets. . . . . . . . . . . . . . . .     (36)         32        (9)         (27)            (8)
                                                                                                                                
NET ASSETS:                                                                                                                     
 Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . .     351         386       359          355            289
                                                                        ------       -----     -----        -----          -----
 End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $ 315       $ 418     $ 350        $ 328          $ 281
                                                                        ------       -----     -----        -----          -----
                                                                        ------       -----     -----        -----          -----

</TABLE>

* Name changed. See Note 1.   


      The accompanying notes are an integral part of these financial statements.
    


                                     SA-5 


<PAGE>

   
                                       CNA

                               GROUP VEL ACCOUNT   
      
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)   
                                  (UNAUDITED)    
                      NINE MONTHS ENDED SEPTEMBER 30, 1998  


<TABLE>
<CAPTION>

                                                                     SELECT       FIDELITY      FIDELITY     FIDELITY   FIDELITY
                                                                     CAPITAL         VIP            VIP         VIP        VIP  
                                                                  APPRECIATION   HIGH INCOME  EQUITY-INCOME   GROWTH    OVERSEAS
                                                                  ------------   -----------  -------------  --------   --------
<S>                                                               <C>            <C>          <C>            <C>        <C>     
INCREASE IN NET ASSETS :                                                                                                        
 FROM OPERATIONS:                                                                                                               
  Net investment income. . . . . . . . . . . . . . . . . . . . .  $       -     $      21      $      5     $      2   $      5 
  Net realized gain on investments . . . . . . . . . . . . . . .          -            13            17           48         16 
  Net unrealized gain (loss) on investments. . . . . . . . . . .        (38)          (59)          (34)          (7)       (34)
                                                                  ---------      --------      --------     --------   -------- 
  Net increase in net assets from operations . . . . . . . . . .        (38)          (25)          (12)          43        (13)
                                                                  ---------      --------      --------     --------   -------- 
 FROM CAPITAL TRANSACTIONS :                                                                                                    
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . . .          -             -             -            -          - 
  Terminations . . . . . . . . . . . . . . . . . . . . . . . . .          -             -             -            -          - 
  Insurance and other charges. . . . . . . . . . . . . . . . . .          -             -             -            -          - 
  Other transfers from (to) the General Account of First
   Allmerica Financial Life Insurance Company (Sponsor). . . . .          -             -             -            -          - 
  Net increase in investments by First Allmerica Financial                                                                      
   Life Insurance Company (Sponsor). . . . . . . . . . . . . . .          -             -             -            -          - 
                                                                  ---------      --------      --------     --------   -------- 
  Net increase in net assets from capital transactions . . . . .          -             -             -            -          - 
                                                                  ---------      --------      --------     --------   -------- 
                                                                                                                                
  Net increase (decrease) in net assets. . . . . . . . . . . . .        (38)          (25)          (12)          43        (13)
                                                                                                                                
                                                                                                                                
NET ASSETS:                                                                                                                     
 Beginning of period . . . . . . . . . . . . . . . . . . . . . .        346           297           352          353        272 
                                                                  ---------      --------      --------     --------   -------- 
 End of period . . . . . . . . . . . . . . . . . . . . . . . . .  $     308      $    272      $    340     $    396   $    259 
                                                                  ---------      --------      --------     --------   -------- 
                                                                  ---------      --------      --------     --------   -------- 

<CAPTION>

                                                                  FIDELITY    T. ROWE PRICE      DGPF         INVESCO    INVESCO    
                                                                   VIP II    INTERNATIONAL  INTERNATIONAL   INDUSTRIAL    TOTAL     
                                                               ASSET MANAGER   STOCK (a)       EQUITY       INCOME (a)   RETURN (a) 
                                                               ------------- -------------  -------------   ----------   ---------  
<S>                                                             <C>          <C>            <C>             <C>          <C>
INCREASE IN NET ASSETS :                                                                                                            
 FROM OPERATIONS:                                                                                                                   
  Net investment income. . . . . . . . . . . . . . . . . . . .  $    10         $    -        $    11         $   -       $    -    
  Net realized gain on investments . . . . . . . . . . . . . .       29              -              -             -            -    
  Net unrealized gain (loss) on investments. . . . . . . . . .      (33)             -            (21)            -            -    
                                                                -------         ------        -------         -----       ------    
  Net increase in net assets from operations . . . . . . . . .        6              -            (10)            -            -    
                                                                -------         ------        -------         -----       ------    
 FROM CAPITAL TRANSACTIONS :                                                                                                        
  Net premiums . . . . . . . . . . . . . . . . . . . . . . . .        -              -              -             -            -    
  Terminations . . . . . . . . . . . . . . . . . . . . . . . .        -              -              -             -            -    
  Insurance and other charges. . . . . . . . . . . . . . . . .        -              -              -             -            -    
  Other transfers from (to) the General Account of First
   Allmerica Financial Life Insurance Company (Sponsor). . . .        -              -              -             -            -    
  Net increase in investments by First Allmerica Financial                                                                          
   Life Insurance Company (Sponsor). . . . . . . . . . . . . .        -              -              -             -            -    
                                                                -------         ------        -------         -----       ------    
  Net increase in net assets from capital transactions . . . .        -              -              -             -            -    
                                                                -------         ------        -------         -----       ------    
                                                                                                                                    
  Net increase (decrease) in net assets. . . . . . . . . . . .        6              -            (10)            -            -    
                                                                                                                                    
                                                                                                                                    
NET ASSETS:                                                                                                                         
 Beginning of period . . . . . . . . . . . . . . . . . . . . .      311              -            278             -            -    
                                                                -------         ------        -------         -----       ------    
 End of period . . . . . . . . . . . . . . . . . . . . . . . .  $   317         $    -        $   268         $   -       $    -    
                                                                -------         ------        -------         -----       ------    
                                                                -------         ------        -------         -----       ------    

</TABLE>

(a) For the period ended September 30, 1998, there were no transactions. 


  The accompanying notes are an integral part of these financial statements.
    


                                     SA-6 
<PAGE>

   
                                  GROUP VEL ACCOUNT

                            NOTES TO FINANCIAL STATEMENTS

                                    (UNAUDITED)




NOTE 1 -- ORGANIZATION

     The Group VEL Account (Group VEL) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company) established on November
13, 1996 (initial investment by the Company occurred on May 1, 1995), for the
purpose of separating from the general assets of the Company those assets used
to fund the variable portion of certain flexible premium variable life policies
issued by the Company. The Company is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Group VEL are clearly identified and distinguished from the other
assets and liabilities of the Company. Group VEL cannot be charged with
liabilities arising out of any other business of the Company. 

     Group VEL is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Group VEL currently offers
twenty Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of the Allmerica Investment Trust (the Trust) managed by
Allmerica Investment Management Company, Inc., a wholly-owned subsidiary of
First Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or
the Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by  Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc. The Trust,  Fidelity VIP, 
Fidelity VIP II,  T. Rowe Price, DGPF  and INVESCO (the Funds) are open-end,
diversified management investment companies registered under the 1940 Act.
INVESCO is available only to employees of INVESCO and its affiliates. 

     Effective January 9, 1998, the investment portfolio of the Trust, which was
formerly known as Small-Mid Cap Value Fund changed its name to Select Value
Opportunity Fund.

NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES

     INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP
II, T. Rowe Price, DGPF, or INVESCO. Net realized gains and losses on securities
sold are determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price,  DGPF, or INVESCO at net asset value. 

     FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. The Company anticipates no tax liability
resulting from the operations of Group VEL. Therefore, no provision for income
taxes has been charged against Group VEL. 
    


                                         SA-7
<PAGE>

   
<TABLE>
<CAPTION>
premium =       $4,200 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         1
                                                 CURRENT COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            4,410        113       3,498     250,000        342       3,727    250,000         571      3,956          250,000
     2            9,041      3,049       6,903     250,000      3,726       7,580    250,000       4,431      8,285          250,000
     3           13,903      8,083      10,214     250,000      9,431      11,562    250,000      10,892     13,023          250,000
     4           19,008     12,363      13,429     250,000     14,610      15,676    250,000      17,144     18,209          250,000
     5           24,368     16,549      16,549     250,000     19,926      19,926    250,000      23,891     23,891          250,000
     6           29,996     19,572      19,572     250,000     24,317      24,317    250,000      30,118     30,118          250,000
     7           35,906     22,493      22,493     250,000     28,848      28,848    250,000      36,940     36,940          250,000
     8           42,112     25,312      25,312     250,000     33,524      33,524    250,000      44,423     44,423          250,000
     9           48,627     28,028      28,028     250,000     38,352      38,352    250,000      52,634     52,634          250,000
     10          55,469     30,638      30,638     250,000     43,333      43,333    250,000      61,650     61,650          250,000
     11          62,652     33,138      33,138     250,000     48,472      48,472    250,000      71,554     71,554          250,000
     12          70,195     35,493      35,493     250,000     53,743      53,743    250,000      82,417     82,417          250,000
     13          78,114     37,699      37,699     250,000     59,149      59,149    250,000      94,345     94,345          250,000
     14          86,430     39,761      39,761     250,000     64,704      64,704    250,000     107,466    107,466          250,000
     15          95,161     41,668      41,668     250,000     70,408      70,408    250,000     121,915    121,915          250,000
     16         104,330     43,410      43,410     250,000     76,262      76,262    250,000     137,845    137,845          250,000
     17         113,956     45,008      45,008     250,000     82,297      82,297    250,000     155,452    155,452          250,000
     18         124,064     46,451      46,451     250,000     88,516      88,516    250,000     174,935    174,935          250,000
     19         134,677     47,724      47,724     250,000     94,922      94,922    250,000     196,526    196,526          250,000
     20         145,821     48,812      48,812     250,000    101,523     101,523    250,000     220,422    220,422          268,915

   Age 60        95,161     41,668      41,668     250,000     70,408      70,408    250,000     121,915    121,915          250,000
   Age 65       145,821     48,812      48,812     250,000    101,523     101,523    250,000     220,422    220,422          268,915
   Age 70       210,477     50,529      50,529     250,000    137,542     137,542    250,000     380,085    380,085          440,898
   Age 75       292,995     43,810      43,810     250,000    180,464     180,464    250,000     636,102    636,102          680,629
</TABLE>
    




<PAGE>

   
<TABLE>
<CAPTION>
premium =       $4,200 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         1
                                                GUARANTEED COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            4,410          0       2,750     250,000          0       2,943    250,000           0      3,136          250,000
     2            9,041      1,544       5,397     250,000      2,101       5,955    250,000       2,684      6,537          250,000
     3           13,903      5,808       7,939     250,000      6,905       9,036    250,000       8,096     10,228          250,000
     4           19,008      9,305      10,370     250,000     11,116      12,182    250,000      13,165     14,231          250,000
     5           24,368     12,691      12,691     250,000     15,395      15,395    250,000      18,580     18,580          250,000
     6           29,996     14,897      14,897     250,000     18,672      18,672    250,000      23,307     23,307          250,000
     7           35,906     16,975      16,975     250,000     22,003      22,003    250,000      28,440     28,440          250,000
     8           42,112     18,917      18,917     250,000     25,382      25,382    250,000      34,015     34,015          250,000
     9           48,627     20,711      20,711     250,000     28,798      28,798    250,000      40,069     40,069          250,000
     10          55,469     22,343      22,343     250,000     32,238      32,238    250,000      46,643     46,643          250,000
     11          62,652     23,804      23,804     250,000     35,698      35,698    250,000      53,794     53,794          250,000
     12          70,195     25,086      25,086     250,000     39,169      39,169    250,000      61,581     61,581          250,000
     13          78,114     26,178      26,178     250,000     42,644      42,644    250,000      70,075     70,075          250,000
     14          86,430     27,072      27,072     250,000     46,119      46,119    250,000      79,360     79,360          250,000
     15          95,161     27,757      27,757     250,000     49,585      49,585    250,000      89,529     89,529          250,000
     16         104,330     28,204      28,204     250,000     53,019      53,019    250,000     100,679    100,679          250,000
     17         113,956     28,391      28,391     250,000     56,404      56,404    250,000     112,931    112,931          250,000
     18         124,064     28,279      28,279     250,000     59,710      59,710    250,000     126,417    126,417          250,000
     19         134,677     27,820      27,820     250,000     62,899      62,899    250,000     141,294    141,294          250,000
     20         145,821     26,968      26,968     250,000     65,934      65,934    250,000     157,756    157,756          250,000

   Age 60        95,161     27,757      27,757     250,000     49,585      49,585    250,000      89,529     89,529          250,000
   Age 65       145,821     26,968      26,968     250,000     65,934      65,934    250,000     157,756    157,756          250,000
   Age 70       210,477     15,288      15,288     250,000     77,718      77,718    250,000     271,927    271,927          315,436
   Age 75       292,995          0     -17,009     250,000     78,126      78,126    250,000     455,683    455,683          487,580
</TABLE>
    



<PAGE>

   
<TABLE>
<CAPTION>
premium =       $1,400 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE       30
                                                                                              SPECIFIED FACE AMOUNT=     $75,000 
                                                                                                  SUM INSURED OPTION        2
                                                 CURRENT COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            1,470        296       1,220      76,220        374       1,298     76,298         452      1,376           76,376
     2            3,014      1,366       2,416      77,416      1,598       2,648     77,648       1,840      2,890           77,890
     3            4,634      3,099       3,589      78,589      3,564       4,054     79,054       4,067      4,557           79,557
     4            6,336      4,493       4,738      79,738      5,271       5,515     80,515       6,146      6,391           81,391
     5            8,123      5,863       5,863      80,863      7,034       7,034     82,034       8,407      8,407           83,407
     6            9,999      6,964       6,964      81,964      8,613       8,613     83,613      10,626     10,626           85,626
     7           11,969      8,041       8,041      83,041     10,254      10,254     85,254      13,065     13,065           88,065
     8           14,037      9,093       9,093      84,093     11,958      11,958     86,958      15,747     15,747           90,747
     9           16,209     10,121      10,121      85,121     13,728      13,728     88,728      18,696     18,696           93,696
     10          18,490     11,123      11,123      86,123     15,564      15,564     90,564      21,937     21,937           96,937
     11          20,884     12,101      12,101      87,101     17,470      17,470     92,470      25,501     25,501          100,501
     12          23,398     13,053      13,053      88,053     19,447      19,447     94,447      29,418     29,418          104,418
     13          26,038     13,979      13,979      88,979     21,499      21,499     96,499      33,725     33,725          108,725
     14          28,810     14,880      14,880      89,880     23,626      23,626     98,626      38,459     38,459          113,459
     15          31,720     15,755      15,755      90,755     25,833      25,833    100,833      43,665     43,665          118,665
     16          34,777     16,603      16,603      91,603     28,120      28,120    103,120      49,387     49,387          124,387
     17          37,985     17,425      17,425      92,425     30,491      30,491    105,491      55,679     55,679          130,679
     18          41,355     18,220      18,220      93,220     32,948      32,948    107,948      62,597     62,597          137,597
     19          44,892     18,986      18,986      93,986     35,493      35,493    110,493      70,202     70,202          145,202
     20          48,607     19,725      19,725      94,725     38,129      38,129    113,129      78,565     78,565          153,565

   Age 60        97,665     25,188      25,188     100,188     69,865      69,865    144,865     224,648    224,648          301,028
   Age 65       132,771     26,059      26,059     101,059     89,487      89,487    164,487     368,989    368,989          450,167
   Age 70       177,576     24,963      24,963      99,963    111,369     111,369    186,369     599,790    599,790          695,756
   Age 75       234,759     20,924      20,924      95,924    134,670     134,670    209,670     969,569    969,569        1,044,569
</TABLE>
    




<PAGE>

   
<TABLE>
<CAPTION>
premium =       $1,400 

                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE
                                                                                                 MALE NON-SMOKER AGE       30
                                                                                              SPECIFIED FACE AMOUNT=     $75,000 
                                                                                                  SUM INSURED OPTION        2

                                                GUARANTEED COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1            1,470        115       1,039      76,039        183       1,107     76,107         251      1,175           76,175
     2            3,014      1,006       2,056      77,056      1,208       2,258     77,258       1,417      2,468           77,468
     3            4,634      2,563       3,053      78,053      2,964       3,454     78,454       3,399      3,889           78,889
     4            6,336      3,783       4,028      79,028      4,452       4,697     79,697       5,206      5,451           80,451
     5            8,123      4,979       4,979      79,979      5,985       5,985     80,985       7,165      7,165           82,165
     6            9,999      5,908       5,908      80,908      7,322       7,322     82,322       9,049      9,049           84,049
     7           11,969      6,813       6,813      81,813      8,707       8,707     83,707      11,116     11,116           86,116
     8           14,037      7,694       7,694      82,694     10,143      10,143     85,143      13,386     13,386           88,386
     9           16,209      8,549       8,549      83,549     11,628      11,628     86,628      15,875     15,875           90,875
     10          18,490      9,377       9,377      84,377     13,164      13,164     88,164      18,606     18,606           93,606
     11          20,884     10,180      10,180      85,180     14,752      14,752     89,752      21,603     21,603           96,603
     12          23,398     10,954      10,954      85,954     16,392      16,392     91,392      24,889     24,889           99,889
     13          26,038     11,701      11,701      86,701     18,087      18,087     93,087      28,496     28,496          103,496
     14          28,810     12,418      12,418      87,418     19,836      19,836     94,836      32,452     32,452          107,452
     15          31,720     13,107      13,107      88,107     21,643      21,643     96,643      36,793     36,793          111,793
     16          34,777     13,765      13,765      88,765     23,505      23,505     98,505      41,556     41,556          116,556
     17          37,985     14,393      14,393      89,393     25,425      25,425    100,425      46,782     46,782          121,782
     18          41,355     14,988      14,988      89,988     27,405      27,405    102,405      52,517     52,517          127,517
     19          44,892     15,549      15,549      90,549     29,442      29,442    104,442      58,809     58,809          133,809
     20          48,607     16,076      16,076      91,076     31,539      31,539    106,539      65,715     65,715          140,715

   Age 60        97,665     18,719      18,719      93,719     55,377      55,377    130,377     184,676    184,676          259,676
   Age 65       132,771     17,305      17,305      92,305     68,418      68,418    143,418     300,388    300,388          375,388
   Age 70       177,576     12,528      12,528      87,528     80,379      80,379    155,379     483,385    483,385          560,727
   Age 75       234,759      2,382       2,382      77,382     88,385      88,385    163,385     772,434    772,434          847,434
</TABLE>
    


<PAGE>

   
<TABLE>
<CAPTION>
premium =      $13,160 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         3

                                                 CURRENT COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>

     1           13,818      7,807     12,089     250,000      8,561     12,843     250,000       9,315       13,597         250,000
     2           28,327     18,477     23,944     250,000     20,744     26,210     250,000      23,102       28,568         250,000
     3           43,561     33,438     35,570     250,000     37,996     40,127     250,000      42,927       45,058         250,000
     4           59,557     45,904     46,970     250,000     53,551     54,617     250,000      62,160       63,226         250,000
     5           76,353     58,150     58,150     250,000     69,710     69,710     250,000      83,252       83,252         250,000
     6           93,989     69,115     69,115     250,000     85,434     85,434     250,000     105,281      105,281         282,152
     7          112,506     79,866     79,866     250,000    101,790    101,790     264,653     129,411      129,411         336,468
     8          131,950     90,411     90,411     250,000    118,725    118,725     299,186     155,840      155,840         392,716
     9          152,365    100,753    100,753     250,000    136,257    136,257     332,468     184,783      184,783         450,871
    10          173,801    110,838    110,838     262,686    154,399    154,399     365,926     216,466      216,466         513,024
    11          196,309    120,664    120,664     277,528    173,165    173,165     398,281     251,139      251,139         577,620
    12          219,943    130,213    130,213     290,374    192,540    192,540     429,363     289,027      289,027         644,531
    13          244,758    139,486    139,486     301,289    212,534    212,534     459,074     330,416      330,416         713,698
    14          270,814    148,489    148,489     311,827    233,164    233,164     489,644     375,619      375,619         788,799
    15          298,173    157,222    157,222     320,733    254,437    254,437     519,051     424,965      424,965         866,929
    16          326,899    165,675    165,675     329,693    276,342    276,342     549,920     478,781      478,781         952,773
    17          357,062    173,889    173,889     335,606    298,955    298,955     576,983     537,567      537,567       1,037,505
    18          388,733    181,854    181,854     341,885    322,266    322,266     605,861     601,725      601,725       1,131,243
    19          421,988    189,570    189,570     346,914    346,288    346,288     633,707     671,721      671,721       1,229,249
    20          456,905    197,043    197,043     350,737    371,035    371,035     660,442     748,071      748,071       1,331,567

  Age 60        298,173    157,222    157,222     320,733    254,437    254,437     519,051     424,965      424,965         866,929
  Age 65        456,905    197,043    197,043     350,737    371,035    371,035     660,442     748,071      748,071       1,331,567
  Age 70        659,493    230,403    230,403     364,036    505,052    505,052     797,982   1,243,638    1,243,638       1,964,948
  Age 75        918,052    257,576    257,576     365,758    657,001    657,001     932,941   1,996,120    1,996,120       2,834,490
</TABLE>
    




<PAGE>

   
<TABLE>
<CAPTION>
premium =      $13,160 
                                          FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
                                          GROUP VARIABLE EXCEPTIONAL LIFE PLUS CERTIFICATE

                                                                                                 MALE NON-SMOKER AGE        45
                                                                                              SPECIFIED FACE AMOUNT=     $250,000 
                                                                                                  SUM INSURED OPTION         3

                                                GUARANTEED COST OF INSURANCE CHARGES
              Premiums
             Paid Plus           Hypothetical 0%                    Hypothetical 6%                     Hypothetical 12%
              Interest       Gross Investment Return            Gross Investment Return              Gross Investment Return
                             -----------------------            -----------------------              -----------------------
   Policy      At 5%    Surrender     Policy      Death    Surrender     Policy     Death     Surrender    Policy        Death
    Year      Per Year    Value       Value      Benefit     Value       Value     Benefit      Value      Value        Benefit
    ----      --------    -----       -----      -------     -----       -----     -------      -----      -----        -------
<S>           <C>       <C>           <C>        <C>       <C>           <C>       <C>        <C>          <C>          <C>
     1           13,818      6,188     10,470     250,000      6,853     11,135     250,000       7,518       11,800         250,000
     2           28,327     15,257     20,723     250,000     17,245     22,711     250,000      19,314       24,780         250,000
     3           43,561     28,632     30,763     250,000     32,619     34,750     250,000      36,936       39,067         250,000
     4           59,557     39,525     40,590     250,000     46,207     47,272     250,000      53,734       54,800         250,000
     5           76,353     50,212     50,212     250,000     60,304     60,304     250,000      72,138       72,138         250,000
     6           93,989     59,632     59,632     250,000     73,874     73,874     250,000      91,261       91,261         250,000
     7          112,506     68,846     68,846     250,000     88,003     88,003     250,000     112,207      112,207         291,739
     8          131,950     77,857     77,857     250,000    102,698    102,698     258,798     135,048      135,048         340,321
     9          152,365     86,664     86,664     250,000    117,832    117,832     287,510     159,938      159,938         390,249
    10          173,801     95,267     95,267     250,000    133,398    133,398     316,153     187,032      187,032         443,265
    11          196,309    103,671    103,671     250,000    149,399    149,399     343,617     216,511      216,511         497,974
    12          219,943    111,855    111,855     250,000    165,838    165,838     369,820     248,571      248,571         554,314
    13          244,758    119,764    119,764     258,690    182,724    182,724     394,684     283,431      283,431         612,211
    14          270,814    127,396    127,396     267,532    200,048    200,048     420,102     321,302      321,302         674,735
    15          298,173    134,757    134,757     274,904    217,817    217,817     444,347     362,434      362,434         739,365
    16          326,899    141,828    141,828     282,238    235,995    235,995     469,631     407,025      407,025         809,980
    17          357,062    148,630    148,630     286,857    254,610    254,610     491,396     455,394      455,394         878,911
    18          388,733    155,142    155,142     291,666    273,613    273,613     514,392     507,753      507,753         954,575
    19          421,988    161,356    161,356     295,281    292,981    292,981     536,155     564,362      564,362       1,032,783
    20          456,905    167,274    167,274     297,748    312,699    312,699     556,604     625,519      625,519       1,113,425

  Age 60        298,173    134,757    134,757     274,904    217,817    217,817     444,347     362,434      362,434         739,365
  Age 65        456,905    167,274    167,274     297,748    312,699    312,699     556,604     625,519      625,519       1,113,425
  Age 70        659,493    192,397    192,397     303,987    415,688    415,688     656,787   1,010,453    1,010,453       1,596,515
  Age 75        918,052    210,325    210,325     298,661    523,830    523,830     743,839   1,561,204    1,561,204       2,216,909
</TABLE>
    
<PAGE>
                 GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
 
This Prospectus describes certificates ("Certificate" or "Certificates") issued
under group flexible premium variable life insurance policies ("Policy" or
"Policies") offered by First Allmerica Financial Life Insurance Company
("Company") to eligible applicants ("Certificate Owners") who are members of a
non-qualified benefit plan having a minimum of five or more members, depending
on the group, and are Age 80 years old and under. Within limits, you may choose
the amount of initial premium desired and the initial Death Benefit. You have
the flexibility to vary the frequency and amount of premium payments, subject to
certain restrictions and conditions. You may withdraw a portion of the
Certificate's Surrender Value, or the Certificate may be fully surrendered at
any time, subject to certain limitations.
 
The Certificates permit you to allocate Net Premiums among up to 20 of 22
sub-accounts ("Sub-Accounts") of the Group VEL Account ("Separate Account"), a
separate account of the Company, and a fixed interest account ("General
Account") of the Company (together "Accounts"). Each Sub-Account invests its
assets in a corresponding investment portfolio of Allmerica Investment Trust
("Trust"), Fidelity Variable Insurance Products Fund ("Fidelity VIP"), Fidelity
Variable Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price
International Series, Inc. ("T. Rowe Price"), Delaware Group Premium Fund, Inc.
("DGPF") and INVESCO Variable Investment Funds, Inc. ("INVESCO VIF"). The
following underlying funds are available under the Certificates (certain Funds
may not be available in all states):
 
<TABLE>
<S>                                 <C>
ALLMERICA INVESTMENT TRUST          FIDELITY VIP
Select Aggressive Growth Fund       Overseas Portfolio
Select Capital Appreciation Fund    Equity-Income Portfolio
Select Value Opportunity Fund       Growth Portfolio
Select Emerging Markets Fund        High Income Portfolio
Select International Equity Fund
Select Growth Fund                  FIDELITY VIP II
Select Strategic Growth Fund        Asset Manager Portfolio
Growth Fund
Equity Index Fund                   T. ROWE PRICE
Select Growth and Income Fund       T. Rowe Price International Stock
                                    Portfolio
Investment Grade Income Fund
Government Bond Fund                INVESCO VIF*
Money Market Fund                   Total Return Fund
                                    Industrial Income Fund
DGPF
International Equity Series
</TABLE>
 
*The Total Return Fund and the Industrial Income Fund of INVESCO VIF are
available only to employees of INVESCO and its affiliates.
 
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, FIDELITY VARIABLE INSURANCE PRODUCTS FUND, FIDELITY
VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.,
DELAWARE GROUP PREMIUM FUND, INC., AND INVESCO VARIABLE INVESTMENT FUNDS, INC.
THE FIDELITY VIP HIGH INCOME PORTFOLIO MAY INVEST IN HIGHER-YIELDING,
HIGHER-RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES AND
POLICIES" IN THIS PROSPECTUS). INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS
FOR FUTURE REFERENCE.
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 
THE CERTIFICATES ARE OBLIGATIONS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CERTIFICATES ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CERTIFICATES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS
IN THE CERTIFICATES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF
VALUE AND POSSIBLE LOSS OF PRINCIPAL.
 
                               DATED MAY 1, 1998
               440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
                                 (508) 855-1000
<PAGE>
(Continued from cover page)
 
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
 
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (See "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
 
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
 
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY OR CERTIFICATE.
 
                                       2
<PAGE>
                               TABLE OF CONTENTS
 
<TABLE>
<S>                                                                                     <C>
SPECIAL TERMS.........................................................................          5
SUMMARY...............................................................................          8
PERFORMANCE INFORMATION...............................................................         17
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS............         22
INVESTMENT OBJECTIVES AND POLICIES....................................................         24
INVESTMENT ADVISORY SERVICES..........................................................         26
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.....................................         29
VOTING RIGHTS.........................................................................         29
THE CERTIFICATE.......................................................................         30
  Enrollment Form for a Certificate...................................................         30
  Free-Look Period....................................................................         31
  Conversion Privileges...............................................................         31
  Premium Payments....................................................................         32
  Allocation of Net Premiums..........................................................         32
  Transfer Privilege..................................................................         33
  Election of Death Benefit Options...................................................         34
  Guideline Premium Test and Cash Value Accumulation Test.............................         34
  Death Proceeds......................................................................         35
  Change in Death Benefit Option......................................................         37
  Change in Face Amount...............................................................         37
  Certificate Value and Surrender Value...............................................         39
  Payment Options.....................................................................         40
  Optional Insurance Benefits.........................................................         40
  Surrender...........................................................................         40
  Paid-Up Insurance Option............................................................         40
  Partial Withdrawal..................................................................         41
CHARGES AND DEDUCTIONS................................................................         41
  Premium Expense Charge..............................................................         42
  Monthly Deduction from Certificate Value............................................         42
  Charges Reflected in the Assets of the Separate Account.............................         45
  Surrender Charge....................................................................         45
  Charges on Partial Withdrawal.......................................................         47
  Transfer Charges....................................................................         47
  Charge for Change in Face Amount....................................................         48
  Other Administrative Charges........................................................         48
CERTIFICATE LOANS.....................................................................         48
CERTIFICATE TERMINATION AND REINSTATEMENT.............................................         49
OTHER CERTIFICATE PROVISIONS..........................................................         51
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY.......................................         53
DISTRIBUTION..........................................................................         54
SERVICES..............................................................................         54
REPORTS...............................................................................         54
LEGAL PROCEEDINGS.....................................................................         55
FURTHER INFORMATION...................................................................         55
INDEPENDENT ACCOUNTANTS...............................................................         55
FEDERAL TAX CONSIDERATIONS............................................................         55
  The Company and the Separate Account................................................         55
  Taxation of the Certificates........................................................         56
  Certificate Loans...................................................................         56
  Modified Endowment Contracts........................................................         57
</TABLE>
 
                                       3
<PAGE>
<TABLE>
<S>                                                                                     <C>
MORE INFORMATION ABOUT THE GENERAL ACCOUNT............................................         57
FINANCIAL STATEMENTS..................................................................         59
APPENDIX A -- OPTIONAL BENEFITS.......................................................        A-1
APPENDIX B -- PAYMENT OPTIONS.........................................................        B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES AND ACCUMULATED
 PREMIUMS.............................................................................        C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES................................        D-1
</TABLE>
 
                                       4
<PAGE>
                                 SPECIAL TERMS
 
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
 
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
 
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
 
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
 
COMPANY: First Allmerica Financial Life Insurance Company.
 
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
 
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
 
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
 
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
 
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
 
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
 
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
 
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate.
 
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
 
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard Ordinary
Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex
Certificates), net investment earnings at an annual effective rate of 5%, and
fees and charges as set forth in the Certificate and any
 
                                       5
<PAGE>
Certificate riders. The Death Benefit Option 1 Guideline Annual Premium is used
when calculating the maximum surrender charge.
 
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
 
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
 
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
 
MINIMUM DEATH BENEFIT: The minimum Death Benefit required to qualify the
Certificate as "life insurance" under federal tax laws. The Minimum Death
Benefit varies by Age. It is calculated by multiplying the Certificate Value by
a percentage determined by the Insured's Age.
 
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
 
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
 
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
 
NET PREMIUM: An amount equal to the premium less any premium expense charge.
 
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
 
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
 
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
 
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
 
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Fidelity Variable Insurance Products
Fund or the Fidelity Variable Insurance Products Fund II, the T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc. or the
International Equity Series of the Delaware Group Premium Fund, Inc. The Total
Return Fund and the Industrial Income Fund of INVESCO VIF are available only to
employees of INVESCO Funds Group, Inc. and its affiliates.
 
                                       6
<PAGE>
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
 
UNDERLYING FUNDS ("FUNDS"): The Funds of Allmerica Investment Trust, the
Portfolios of Fidelity Variable Insurance Products Fund and Fidelity Variable
Insurance Products Fund II, the Portfolio of T. Rowe Price International Series,
Inc., the Series of Delaware Group Premium Fund, Inc., and the Funds of INVESCO
Variable Investment Funds, Inc., which are available under the Certificates.
 
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
 
UNIT: A measure of your interest in a Sub-Account.
 
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
 
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
 
WRITTEN REQUEST: A request by the Certificate Owner in writing, satisfactory to
the Company.
 
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
 
                                       7
<PAGE>
                                    SUMMARY
 
THE CERTIFICATE
 
The Certificate issued under a group flexible premium variable life Policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
 
    - life insurance coverage on the named Insured;
 
    - Certificate Value;
 
    - surrender rights and partial withdrawal rights;
 
    - loan privileges; and
 
    - in some cases, additional insurance benefits available by rider for an
      additional charge.
 
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. Although you may establish a schedule of premium payments
("planned premium payments"), failure to make the planned premium payments will
not necessarily cause a Certificate to lapse, nor will making the planned
premium payments guarantee that a Certificate will remain in force. Thus, you
may, but are not required to, pay additional premiums.
 
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
 
SURRENDER CHARGES
 
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
 
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
 
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the
 
                                       8
<PAGE>
maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS --
"Surrender Charge."
 
SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
 
A separate surrender charge may apply to and be calculated for each increase in
the Face Amount. The maximum surrender charge for the increase is equal to the
sum of (a) plus (b), where (a) is a deferred administrative charge of up to
$8.50 per thousand dollars of increase, and (b) is a deferred sales charge of up
to 50% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to the Guideline
Annual Premium for the increase. In accordance with limitations under state
insurance regulations, the amount of the surrender charge will not exceed a
specified amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
 
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
 
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge."
 
PREMIUM EXPENSE CHARGE
 
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from zero to 1% of premiums, depending on the group to which
the Policy is issued. The charge for distribution expenses may range from zero
to 5%. See CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
 
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
 
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
 
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
 
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-
 
                                       9
<PAGE>
Account to which it relates on a Monthly Processing Date, the unpaid balance
will be totaled and the Company will make a Pro-Rata Allocation.
 
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from Certificate Value."
 
TRANSACTION CHARGES
 
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
 
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
 
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
 
CHARGE FOR CHANGE IN FACE AMOUNT
 
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
 
TRANSFER CHARGE
 
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
 
OTHER ADMINISTRATIVE CHARGES
 
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
 
CHARGES OF THE UNDERLYING INVESTMENT FUNDS
 
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. See CHARGES AND
DEDUCTIONS -- "Charges Reflected in the Assets of the Separate Account." The
levels of fees and expenses vary among the Underlying Investment Funds.
 
CERTIFICATE VALUE AND SURRENDER VALUE
 
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has
 
                                       10
<PAGE>
been allocated, and partial withdrawals. The Certificate Value may be relevant
to the computation of the Death Proceeds. You bear the entire investment risk
for amounts allocated to the Separate Account. The Company does not guarantee a
minimum Certificate Value.
 
The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
 
DEATH PROCEEDS
 
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the Face Amount plus the Certificate Value or the Minimum Death
Benefit. The Minimum Death Benefit is equivalent to a percentage (determined
each month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE CERTIFICATE -- "Death Proceeds."
 
The Death Proceeds under the Certificate may be received in a lump sum or under
one of the Payment Options the Company offers. See APPENDIX B -- PAYMENT
OPTIONS.
 
FLEXIBILITY TO ADJUST DEATH BENEFIT
 
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Changes in Face Amount."
 
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
 
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider and Exchange
Option Rider. See APPENDIX A -- OPTIONAL BENEFITS.
 
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
 
CERTIFICATE ISSUANCE
 
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the
 
                                       11
<PAGE>
enrollment form and medical examination, if any, are completed. If the proposed
Insured cannot answer the eligibility questions "No," and if the proposed
Insured is not a standard risk, insurance coverage will begin only after the
Company (1) approves the enrollment form, (2) the Certificate is delivered and
accepted, and (3) the first premium is paid.
 
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
 
If your Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be allocated to the Money Market Fund of the Trust upon
Issuance and Acceptance of the Certificate. All Certificate Value will be
allocated as you have chosen no later than the expiration of the period during
which you may exercise the "Right-to-Examine Certificate" provision.
 
ALLOCATION OF NET PREMIUMS
 
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
 
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
 
INVESTMENT OPTIONS
 
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account is currently comprised
of 22 Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
Underlying Fund of the Allmerica Investment Trust ("Trust"), managed by
Allmerica Financial Investment Management Services, Inc. ("AFIMS"); of the
Fidelity Variable Insurance Products Fund ("Fidelity VIP") and the Fidelity
Variable Insurance Products Fund II ("Fidelity VIP II"), managed by Fidelity
Management ("FMR"); T. Rowe Price International Series, Inc. ("T. Rowe Price"),
managed by Rowe Price-Fleming International, Inc. ("Price-Fleming"); of the
Delaware Group Premium Fund, Inc. ("DGPF"), managed by Delaware International
Advisers, Ltd. ("Delaware International"); and of INVESCO Variable Investment
Funds, Inc. ("INVESCO VIF") managed by INVESCO Funds Group, Inc. ("INVESCO"),
(available only to employees of INVESCO and its affiliates). In some states,
insurance regulations may restrict the availability of particular Underlying
Funds. The Certificates permit you to transfer Certificate Value among the
available Sub-Accounts and between the Sub-Accounts and the General Account,
subject to certain limitations described under THE CERTIFICATE -- "Transfer
Privilege."
 
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
 
                                       12
<PAGE>
CHARGES OF THE UNDERLYING FUNDS
 
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1997. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
 
<TABLE>
<CAPTION>
                                                                 MANAGEMENT FEE
                                                                   (AFTER ANY                         TOTAL EXPENSES
                                                                   VOLUNTARY        OTHER FUND          (AFTER ANY
UNDERLYING FUND                                                     WAIVER)          EXPENSES     APPLICABLE LIMITATIONS)
- -------------------------------------------------------------  ------------------  -------------  -----------------------
<S>                                                            <C>                 <C>            <C>
Select Aggressive Growth Fund................................         0.89%*             0.09%             0.98%(1)(3)
Select Capital Appreciation Fund.............................         0.95%              0.15%             1.10%(1)
Select Value Opportunity Fund................................         0.90%**            0.14%             1.04%(1)(3)
Select Emerging Markets Fund (@).............................         1.35%              0.65%             2.00%(1)
Select International Equity Fund.............................         0.92%              0.20%             1.12%(1)(3)
DGPF International Equity Series.............................         0.75%(4)           0.15%             0.90%(4)
Fidelity VIP Overseas Portfolio..............................         0.75%              0.17%             0.92%(2)
T. Rowe Price International Stock Portfolio..................         1.05%              0.00%             1.05%
Select Growth Fund...........................................         0.85%              0.08%             0.93%(1)(3)
Select Strategic Growth Fund (@).............................         0.85%              0.13%             0.98%(1)
Growth Fund..................................................         0.46%*             0.06%             0.52%(1)(3)
Fidelity VIP Growth Portfolio................................         0.60%              0.09%             0.69%(2)
Equity Index Fund............................................         0.31%              0.13%             0.44%(1)
Select Growth and Income Fund................................         0.70%*             0.07%             0.77%(1)(3)
Fidelity VIP Equity-Income Portfolio.........................         0.50%              0.08%             0.58%(2)
Fidelity VIP II Asset Manager Portfolio......................         0.55%              0.10%             0.65%(2)
Fidelity VIP High Income Portfolio...........................         0.59%              0.12%             0.71%
Investment Grade Income Fund.................................         0.44%*             0.10%             0.54%(1)
Government Bond Fund.........................................         0.50%              0.17%             0.67%(1)
Money Market Fund............................................         0.27%              0.08%             0.35%(1)
INVESCO VIF Industrial Income Fund...........................         0.75%              0.16%             0.91%(##)
INVESCO VIF Total Return Fund................................         0.75%              0.17%             0.92%(##)
</TABLE>
 
* Effective September 1, 1997, the management fee rates for these funds were
revised. The management fee ratios shown in the table above have been adjusted
to assume that the revised rates took effect on January 1, 1997.
 
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations in February, 1998. Expenses shown are annualized and are based on
estimated amounts for the current fiscal year. Actual expense may be greater or
less than shown.
 
** The Select Value Opportunity Fund was formerly known as the "Small-Mid Cap
Value Fund." Effective April 1, 1997, the management fee rate of the former
Small-Mid Cap Value Fund was revised. In addition, effective April 1, 1997 and
until further notice, the management fee rate has been voluntarily limited to an
annual rate of 0.90% of average daily net assets, and total expenses are limited
to 1.25% of average daily net assets. The management fee ratio shown above for
the Select Value Opportunity Fund has been adjusted to assume that the revised
rate and the voluntary limitations took effect on January 1, 1997. Without these
adjustments, the management fee ratio and the total fund expense ratio would
have been 0.95% and 1.09%, respectively. The management fee limitation may be
terminated at any time.
 
(1) Until further notice, AFIMS has declared a voluntary expense limitation of
1.35% of average net assets for the Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.50% for the Select International Equity Fund, 1.25%
for the Select Value Opportunity Fund, 1.20% for the Growth Fund and Select
Growth Fund, 1.10% for the Select Growth and Income, 1.00% for the Investment
Grade Income Fund and Government Bond Fund, and 0.60% for the Money Market Fund
and Equity Index Fund. The total operating expenses of these Funds of the Trust
were less than their respective expense limitations throughout 1997.
 
                                       13
<PAGE>
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.
 
The declaration of a voluntary expense limitation in any year does not bind
AFIMS to declare future expense limitations with respect to these funds. These
limitations may be terminated at any time.
 
(2) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on uninvested
cash balances was used to reduce custodian and transfer agent expenses.
Including these reductions, the total operating expenses presented in the table
would have been 0.57% for Fidelity VIP Equity-Income Portfolio, 0.67% for
Fidelity VIP Growth Portfolio, 0.90% for Fidelity VIP Overseas Portfolio and
0.64% for Fidelity VIP II Asset Manager Portfolio.
 
(3) These funds have entered into agreements with brokers whereby brokers rebate
a portion of commissions. Had these amounts been treated as reductions of
expenses, the total operating expense ratios would have been 0.93% for the
Select Aggressive Growth Fund, 1.10% for the Select International Equity Fund,
0.91% for the Select Growth Fund, 0.50% for the Growth Fund, 0.98% for the
Select Value Opportunity Fund, and 0.74% for the Select Growth and Income Fund.
 
(4) Effective July 1, 1997, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.80% that expired on June 30, 1997. The new limitation will be in effect
through October 31, 1998. The fee ratios shown above have been adjusted to
assume that the new voluntary limitation took effect on January 1, 1997. In
1997, the actual ratio of total annual expenses of the International Equity
Series was 0.85%, and the actual management fee ratio was 0.70%.
 
(##)Various expenses of the Industrial Income Fund and Total Return Fund were
voluntarily absorbed by INVESCO in 1997. If such expenses had not been
voluntarily absorbed, the total operating expenses ratios would have been 0.97%
and 1.10%, respectively.
 
FREE-LOOK PERIOD
 
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
 
If your Certificate provides for a full refund of the initial premium under its
"Right-to-Examine Certificate" provision as required in your state, your refund
will be the greater of (a) your entire premium, or (b) the Certificate Value
plus deductions under the Certificate, or by the Underlying Funds for taxes,
charges or fees. If your Certificate does not provide for a full refund of the
initial premium, you will receive the Certificate Value in the Separate Account,
plus premiums paid, including fees and charges, minus the amounts allocated to
the Separate Account, plus the fees and charges imposed on amounts in the
Separate Account. After an increase in the Face Amount, a right to cancel the
increase also applies. See THE CERTIFICATE -- "Free-Look Period."
 
CONVERSION PRIVILEGES
 
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24
 
                                       14
<PAGE>
Certificate months after the date of an increase in the Face Amount. Where
required by state law, and at your request, the Company will issue a flexible
premium adjustable life insurance Certificate to you. The new Certificate will
have the same face amount, issue Age, Date of Issue, and risk classifications as
the original Certificate. See THE CERTIFICATE -- "Conversion Privileges."
 
PARTIAL WITHDRAWAL
 
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
 
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by the amount of the partial withdrawal charge
deducted. See THE CERTIFICATE -- "Partial Withdrawal" and CHARGES AND DEDUCTIONS
- -- "Charges on Partial Withdrawal."
 
LOAN PRIVILEGE
 
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge, Monthly Deductions, and
interest on the Certificate loan to the end of the Certificate year. Thereafter,
Loan Value is 90% of an amount equal to Certificate Value less the surrender
charge.
 
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the Accounts. In either
case, Certificate Value equal to the Certificate loan will be transferred from
the appropriate Sub-Accounts to the General Account, and will earn monthly
interest at an effective annual rate of at least 6%. Therefore, a Certificate
loan may have a permanent impact on the Certificate Value even though it is
eventually repaid. Although the loan amount is a part of the Certificate Value,
the Death Proceeds will be reduced by the amount of outstanding Debt at the time
of death.
 
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
 
PREFERRED LOAN OPTION
 
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary,
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
 
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
 
                                       15
<PAGE>
CERTIFICATE LAPSE AND REINSTATEMENT
 
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
 
TAX TREATMENT
 
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Certificate. Death Proceeds under the Certificate are excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
 
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
 
The Certificate summarizes the provisions of the group Policy under which it is
issued, which has the purpose of providing insurance protection for the
Beneficiary named therein. References to Certificate rights and features are
intended to represent a Certificate Owner's rights and benefits under the group
Policy. This Summary is intended to provide only a very brief overview of the
more significant aspects of the Certificate. Further detail is provided in this
Prospectus, the Certificate and the group Policy. No claim is made that the
Certificate is in any way similar or comparable to a systematic investment plan
of a mutual fund.
 
                                       16
<PAGE>
                            PERFORMANCE INFORMATION
 
The Certificates were first offered to the public in 1995. However, the Company
may advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Sub-Accounts have been in existence
(Tables I[A] and II[B], and based on the periods that the Underlying Funds have
been in existence (Tables II[A] and II[B]). The results for any period prior to
the Certificates being offered will be calculated as if the Certificates had
been offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in Table I) under a
"representative" Certificate that is surrendered at the end of the applicable
period. For more information on charges under the Certificates, see CHARGES AND
DEDUCTIONS.
 
In each Table below, "One-Year Total Return" refers to the total of the income
generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1997. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
 
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (2) other groups of variable life separate accounts or other
investment products tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds and other investment products
by overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons, such as Morningstar, Inc., who
rank such investment products on overall performance or other criteria; or (3)
the Consumer Price Index (a measure for inflation) to assess the real rate of
return from an investment. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
 
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
 
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       17
<PAGE>
                                   TABLE I(A)
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                      SINCE INCEPTION OF THE SUB-ACCOUNTS
          NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
 
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (non-smoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
 
<TABLE>
<CAPTION>
                                                                                TEN YEARS
                                                        FOR YEAR                 OR SINCE
                                                         ENDED        FIVE      INCEPTION
UNDERLYING FUND                                         12/31/97      YEARS     (IF LESS)
<S>                                                    <C>         <C>          <C>
Select Emerging Markets Fund                              N/A          N/A         N/A
Select Aggressive Growth Fund                             -97.09%      N/A         -91.37%
Select Capital Appreciation Fund                         -100.00%      N/A         -92.45%
Select Value Opportunity Fund                             -91.46%      N/A         -78.84%
T. Rowe Price International Stock Portfolio                  N/A       N/A        -100.00%
Fidelity VIP Overseas Portfolio                          -100.00%      N/A         -92.03%
Select International Equity Fund                         -100.00%      N/A         -92.55%
DGPF International Equity Series                         -100.00%      N/A         -92.63%
Fidelity VIP Growth Portfolio                             -92.71%      N/A         -87.53%
Select Growth Fund                                        -83.01%      N/A         -78.65%
Select Strategic Growth Fund                                 N/A       N/A            N/A
Growth Fund                                               -91.20%      N/A         -83.86%
Equity Index Fund                                         -84.52%      N/A         -77.82%
Fidelity VIP Equity-Income Portfolio                      -88.47%      N/A         -81.40%
Select Growth and Income Fund                             -93.61%      N/A         -84.58%
Fidelity VIP II Asset Manager Portfolio                   -95.32%      N/A         -87.84%
Fidelity VIP High Income Portfolio                        -98.05%      N/A         -89.76%
Investment Grade Income Fund                             -100.00%      N/A         -92.78%
Government Bond Fund                                     -100.00%      N/A         -93.12%
Money Market Fund                                        -100.00%      N/A         -93.35%
INVESCO VIF Industrial Income Fund                           N/A       N/A            N/A
INVESCO VIF Total Return Fund                                N/A       N/A            N/A
</TABLE>
 
The inception dates for the Sub-Accounts are: 11/13/96 for Growth, for
Investment Grade Income, for Money Market, for Equity Index, for Government
Bond, for Select Aggressive Growth, for Select Growth, for Select Growth and
Income, for Select Value Opportunity, for Select International Equity, for the
Select Capital Appreciation Fund, for Fidelity VIP Equity-Income, for Fidelity
VIP Growth, for Fidelity VIP High Income, for Fidelity VIP Overseas, for
Fidelity VIP II Asset Manager, for DGPF International Equity, and for the T.
Rowe Price International Stock. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       18
<PAGE>
                                   TABLE I(B)
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                      SINCE INCEPTION OF THE SUB-ACCOUNTS
          EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
 
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses, all Sub-Account charges, and premium tax and expense
charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE OR
SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
 
<TABLE>
<CAPTION>
                                                                                       TEN YEARS
                                                              FOR YEAR                 OR SINCE
                                                               ENDED        FIVE       INCEPTION
UNDERLYING FUND                                               12/31/97      YEARS      (IF LESS)
<S>                                                          <C>         <C>          <C>
Select Emerging Markets Fund                                       N/A       N/A             N/A
Select Aggressive Growth Fund                                    17.94%      N/A           14.96%
Select Capital Appreciation Fund                                 13.54%      N/A            9.58%
Select Value Opportunity Fund                                    24.04%      N/A           27.90%
T. Rowe Price International Stock Portfolio                        N/A       N/A             N/A
Fidelity VIP Overseas Portfolio                                  10.83%      N/A           11.97%
Select International Equity Fund                                  3.97%      N/A            9.00%
DGPF International Equity Series                                  5.91%      N/A            8.57%
Fidelity VIP Growth Portfolio                                    22.68%      N/A           18.91%
Select Growth Fund                                               33.19%      N/A           28.10%
Select Strategic Growth Fund                                       N/A       N/A             N/A
Growth Fund                                                      24.32%      N/A           22.70%
Equity Index Fund                                                31.55%      N/A           28.96%
Fidelity VIP Equity-Income Portfolio                             27.28%      N/A           25.25%
Select Growth and Income Fund                                    21.71%      N/A           21.96%
Fidelity VIP II Asset Manager Portfolio                          19.86%      N/A           18.59%
Fidelity VIP High Income Portfolio                               16.90%      N/A           16.62%
Investment Grade Income Fund                                      8.74%      N/A            7.72%
Government Bond Fund                                              6.38%      N/A            5.82%
Money Market Fund                                                 4.78%      N/A            4.54%
INVESCO VIF Industrial Income Fund                                 N/A       N/A             N/A
INVESCO VIF Total Return Fund                                      N/A       N/A             N/A
</TABLE>
 
The inception dates for the Sub-Accounts are: 11/13/96 for Growth, for
Investment Grade Income, for Money Market, for Equity Index, for Government
Bond, for Select Aggressive Growth, for Select Growth, for Select Growth and
Income, for Select Value Opportunity, for Select International Equity, for the
Select Capital Appreciation Fund, for Fidelity VIP Equity-Income, for Fidelity
VIP Growth, for Fidelity VIP High Income, for Fidelity VIP Overseas, for
Fidelity VIP II Asset Manager, for DGPF International Equity, and for the T.
Rowe Price International Stock. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       19
<PAGE>
                                  TABLE II(A):
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                    SINCE INCEPTION OF THE UNDERLYING FUNDS
          NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
 
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (nonsmoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
 
<TABLE>
<CAPTION>
                                                                              TEN YEARS
                                                       FOR YEAR                OR SINCE
                                                        ENDED        FIVE     INCEPTION
UNDERLYING FUND                                        12/31/97     YEARS     (IF LESS)
<S>                                                   <C>         <C>         <C>
Select Emerging Markets Fund                                N/A         N/A         N/A
Select Aggressive Growth Fund                            -97.09%      11.26%      14.29%
Select Capital Appreciation Fund                        -100.00%        N/A       -4.18%
Select Value Opportunity Fund                            -91.46%        N/A       10.28%
T. Rowe Price International Stock Portfolio             -100.00%        N/A       -3.43%
Fidelity VIP Overseas Portfolio                         -100.00%       8.59%       6.20%
Select International Equity Fund                        -100.00%        N/A       -0.92%
DGPF International Equity Series                        -100.00%       6.12%       5.88%
Fidelity VIP Growth Portfolio                            -92.71%      12.46%      13.93%
Select Growth Fund                                       -83.01%       9.62%      11.09%
Select Strategic Growth Fund                                N/A         N/A         N/A
Growth Fund                                              -91.20%      10.83%      13.85%
Equity Index Fund                                        -84.52%      13.99%      15.51%
Fidelity VIP Equity-Income Portfolio                     -88.47%      14.62%      13.45%
Select Growth and Income Fund                            -93.61%      11.03%      10.08%
Fidelity VIP II Asset Manager Portfolio                  -95.32%       7.45%       8.90%
Fidelity VIP High Income Portfolio                       -98.05%       8.38%       9.46%
Investment Grade Income Fund                            -100.00%       1.98%       5.76%
Government Bond Fund                                    -100.00%       0.43%       2.16%
Money Market Fund                                       -100.00%      -0.82%       2.27%
INVESCO VIF Industrial Income Fund                       -88.41%        N/A        9.89%
INVESCO VIF Total Return Fund                            -93.24%        N/A        3.96%
</TABLE>
 
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for the T. Rowe Price
International Stock; 8/10/94 for INVESCO VIF Industrial Income; and 6/2/94 for
INVESCO VIF Total Return. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       20
<PAGE>
                                  TABLE II(B)
       AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1997
                    SINCE INCEPTION OF THE UNDERLYING FUNDS
          EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
 
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses, all Sub-Account charges, and premium tax and
expense charges. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE
OR SURRENDER CHARGES. It is assumed that an annual premium payment of $3,000
(approximately one Guideline Annual Premium) was made at the beginning of each
Certificate year and that ALL premiums were allocated to EACH Sub-Account
individually.
 
<TABLE>
<CAPTION>
                                                                                    TEN YEARS
                                                            FOR YEAR                OR SINCE
                                                             ENDED        FIVE      INCEPTION
UNDERLYING FUND                                             12/31/97     YEARS      (IF LESS)
<S>                                                        <C>         <C>         <C>
Select Emerging Markets Fund                                     N/A         N/A          N/A
Select Aggressive Growth Fund                                  17.94%      16.04%       18.79%
Select Capital Appreciation Fund                               13.54%        N/A        22.09%
Select Value Opportunity Fund                                  24.04%        N/A        16.17%
T. Rowe Price International Stock Portfolio                     2.42%        N/A         7.37%
Fidelity VIP Overseas Portfolio                                10.83%      13.38%        8.91%
Select International Equity Fund                                3.97%        N/A        10.42%
DGPF International Equity Series                                5.91%      10.92%       10.57%
Fidelity VIP Growth Portfolio                                  22.68%      17.23%       16.43%
Select Growth Fund                                             33.19%      14.40%       15.61%
Select Strategic Growth Fund                                     N/A         N/A          N/A
Growth Fund                                                    24.32%      15.61%       16.36%
Equity Index Fund                                              31.55%      18.76%       18.90%
Fidelity VIP Equity-Income Portfolio                           27.28%      19.38%       15.96%
Select Growth and Income Fund                                  21.71%      15.81%       14.61%
Fidelity VIP II Asset Manager Portfolio                        19.86%      12.24%       12.00%
Fidelity VIP High Income Portfolio                             16.90%      13.17%       12.07%
Investment Grade Income Fund                                    8.74%       6.81%        8.48%
Government Bond Fund                                            6.38%       5.27%        6.19%
Money Market Fund                                               4.78%       4.03%        5.11%
INVESCO VIF Industrial Income Fund                             27.34%        N/A        22.59%
INVESCO VIF Total Return Fund                                  22.11%        N/A        15.63%
</TABLE>
 
The inception dates for the Underlying Funds are: 4/29/85 for Growth, Investment
Grade Income and Money Market; 9/28/90 for Equity Index; 8/26/91 for Government
Bond; 8/21/92 for Select Aggressive Growth, Select Growth, and Select Growth and
Income; 4/30/93 for Select Value Opportunity; 5/02/94 for Select International
Equity; 4/28/95 for Select Capital Appreciation; 10/09/86 for Fidelity VIP
Equity-Income and Fidelity VIP Growth; 9/19/85 for Fidelity VIP High Income;
1/28/87 for Fidelity VIP Overseas; 9/06/89 for Fidelity VIP II Asset Manager;
10/29/92 for DGPF International Equity; 3/31/94 for the T. Rowe Price
International Stock; 8/10/94 for INVESCO VIF Industrial Income; and 6/2/94 for
INVESCO VIF Total Return. The Select Emerging Markets Fund and the Select
Strategic Growth Fund commenced operations in February 1998.
 
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
 
                                       21
<PAGE>
                    DESCRIPTION OF THE COMPANY, THE SEPARATE
                       ACCOUNT, AND THE UNDERLYING FUNDS
 
THE COMPANY
 
The Company, organized under the laws of Massachusetts in 1844, is the fifth
oldest life insurance company in America. As of December 31, 1997, the Company
and its subsidiaries had over $16.3 billion in combined assets. Effective
October 16, 1995, the Company converted from a mutual life insurance company,
known as State Mutual Life Assurance Company of America, to a stock life
insurance company and adopted its present name. The Company is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). The Company's principal
office 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 SEPARATE ACCOUNT
 
The Separate Account was authorized by vote of the Board of Directors of the
Company on August 20, 1991. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
 
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account, and are kept separate from the general assets of the
Company. Under Massachusetts law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 22 Sub-Accounts. Each Sub-Account is administered and accounted for as part
of the general business of the Company, but the income, capital gains, or
capital losses of each Sub-Account are allocated to such Sub-Account, without
regard to other income, capital gains, or capital losses of the Company or the
other Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio ("Underlying Fund") of the Allmerica Investment Trust, the
Fidelity Variable Insurance Products Fund, the Fidelity Variable Insurance
Products Fund II, T. Rowe Price International Series, Inc., the Delaware Group
Premium Fund, Inc., or the INVESCO Variable Investment Fund, Inc.
 
ALLMERICA INVESTMENT TRUST
 
Allmerica Investment Trust, formerly SMA Investment Trust (the "Trust") is an
open-end, diversified, management investment company registered with the SEC
under the 1940 Act. Such registration does not involve supervision by the SEC of
the investments or investment policy of the Trust or its separate investment
Funds.
 
The Trust was established as a Massachusetts business trust on October 11, 1984
for the purpose of providing a vehicle for the investment of assets of various
separate accounts established by the Company or other affiliated insurance
companies. Thirteen investment portfolios of the Trust ("Funds") are available
under the
 
                                       22
<PAGE>
Certificates, each issuing a series of shares: Select Aggressive Growth Fund,
Select Capital Appreciation Fund, Select Value Opportunity Fund, Select Emerging
Markets Fund, Select Growth Fund, Select International Equity Fund, Select
Strategic Growth Fund, Growth Fund, Equity Index Fund, Select Growth and Income
Fund, Investment Grade Income Fund, Government Bond Fund, and Money Market Fund.
The assets of each Fund are held separate from the assets of the other Funds.
Each Fund operates as a separate investment vehicle and the income or losses of
one Fund generally have no effect on the investment performance of another Fund.
Shares of the Trust are not offered to the general public but solely to such
separate accounts.
 
AFIMS serves as investment adviser of the Trust and has entered into
sub-advisory agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Funds. See INVESTMENT ADVISORY SERVICES.
 
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
 
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and is registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Certificates: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio
and Fidelity VIP Overseas Portfolio.
 
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR is one of America's largest investment management
organizations, and has its principal business address at 82 Devonshire Street,
Boston, Massachusetts. It is composed of a number of different companies which
provide a variety of financial services and products. FMR is the original
Fidelity company, founded in 1946. It provides a number of mutual funds and
other clients with investment research and portfolio management services. The
Portfolios of Fidelity VIP, as part of their operating expenses, pay an
investment management fee to FMR. See "Investment Advisory Services to Fidelity
VIP and Fidelity VIP II Funds."
 
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II FUND
 
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see "Investment Advisory Services to Fidelity VIP and Fidelity VIP II Funds"),
is an open-end, diversified, management investment company organized as a
Massachusetts business trust on March 21, 1988 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the
Certificates: the Fidelity VIP II Asset Manager Portfolio.
 
T. ROWE PRICE INTERNATIONAL SERIES, INC.
 
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") (see "Investment Advisory
Services to T. Rowe Price"), is an open-end, diversified, management investment
company organized as a Maryland corporation in 1994 and registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Certificates: the T. Rowe Price International Stock Portfolio.
 
DELAWARE GROUP PREMIUM FUND, INC.
 
Delaware Group Premium Fund, Inc. ("DGPF") is an open-end, diversified,
management investment company registered with the SEC under the 1940 Act. DGPF
was established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. One investment
portfolio is available under the Certificates: the International Equity Series
("Series"). The investment adviser for the International Equity Series is
Delaware International Advisers Ltd. ("Delaware International"). See "Investment
Advisory Services to DGPF."
 
                                       23
<PAGE>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
 
INVESCO Variable Investment Funds, Inc. ("INVESCO VIF") is an open-end,
diversified, management investment company that was organized as a Maryland
corporation on August 19, 1993, and is registered with the SEC under the 1940
Act. INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser of the
Industrial Income Fund and the Total Return Fund, the only Funds of INVESCO VIF
that are available under the Certificates. These two Funds are available only to
employees of INVESCO and its affiliates.
 
                       INVESTMENT OBJECTIVES AND POLICIES
 
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
 
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.
 
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital in a
manner consistent with the preservation of capital. Realization of income is not
a significant investment consideration and any income realized on the Fund's
investments will be incidental to its primary objective. The Fund invests
primarily in common stock of industries and companies which are believed to be
experiencing favorable demand for their products and services, and which operate
in a favorable competitive environment and regulatory climate.
 
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.
 
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
 
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
 
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
 
FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
 
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
 
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
 
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
 
                                       24
<PAGE>
GROWTH FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Growth Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
 
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks. Equity Index
Fund -- seeks to provide investment results that correspond to the aggregate
price and yield performance of a representative selection of United States
publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500.
 
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
 
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.
 
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
 
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money market instruments.
 
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.
 
INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of fixed
income securities with the objective of seeking as high a level of total return
(including both income and capital appreciation) as is consistent with prudent
investment management.
 
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
 
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
 
THE FOLLOWING FUNDS OF INVESCO VARIABLE INVESTMENT FUNDS, INC. ARE AVAILABLE
ONLY TO EMPLOYEES OF INVESCO AND ITS AFFILIATES:
 
INVESCO VIF INDUSTRIAL INCOME FUND -- seeks the best possible current income
while following sound investment practices. Capital growth potential is an
additional but secondary consideration in the selection of portfolio securities.
The Fund seeks to achieve its objective by investing in securities which will
provide a relatively high yield and stable return and which, over a period of
years, may also provide capital appreciation.
 
                                       25
<PAGE>
INVESCO VIF TOTAL RETURN FUND -- seeks a high total return on investment through
capital appreciation and current income by investing in a combination of equity
securities (consisting of common stocks and, to a lesser degree, securities
convertible into common stock) and fixed income securities.
 
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
 
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
 
                          INVESTMENT ADVISORY SERVICES
 
INVESTMENT ADVISORY SERVICES TO THE TRUST
 
The overall responsibility for the supervision of the affairs of the Trust vests
in the Trustees. The Trust has entered into a Management Agreement with AFIMS,
an indirect wholly owned subsidiary of the Company, to handle the day-to-day
affairs of the Trust. AFIMS, subject to review by the Trustees, is responsible
for the general management of the Funds. AFIMS also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities, and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with AFIMS.
 
Other than the expenses specifically assumed by AFIMS under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with
AFIMS, expenses for proxies, prospectuses, and reports to shareholders, and
other expenses.
 
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreement, the Sub-Adviser is
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. The terms of a Sub-Adviser Agreement cannot be materially changed
without the approval of a majority in interest of the shareholders of the
affected Fund.
 
                                       26
<PAGE>
For providing its services under the Management Agreement, AFIMS will receive a
fee, computed daily at an annual rate based on the average daily net asset value
of each Fund as follows:
 
<TABLE>
<S>                            <C>                 <C>
Select Aggressive Growth Fund  First $100 million       1.00%
                               Next $150 million        0.90%
                               Over $250 million        0.85%
 
Select Capital Appreciation    First $100 million
Fund                                                    1.00%
                               Next $150 million        0.90%
                               Over $250 million        0.85%
 
Select Value Opportunity Fund  First $100 million       1.00%
                               Next $150 million        0.85%
                               Next $250 million        0.80%
                               Next $250 million        0.75%
                               Over $750 million        0.70%
 
Select Emerging Markets Fund   *                        1.35%
 
Select International Equity    First $100 million
Fund                                                    1.00%
                               Next $150 million        0.90%
                               Over $250 million        0.85%
 
Select Growth Fund             *                        0.85%
 
Select Strategic Growth Fund   *                        0.85%
 
Growth Fund                    First $250 million       0.60%
                               Next $250 million        0.40%
                               Over $500 million        0.35%
 
Equity Index Fund              First $50 million        0.35%
                               Next $200 million        0.30%
                               Over $250 million        0.25%
 
Select Growth and Income Fund  First $100 million       0.75%
                               Next $150 million        0.70%
                               Over $250 million        0.65%
 
Investment Grade Income Fund   First $50 million        0.50%
                               Next $50 million         0.45%
                               Over $100 million        0.40%
 
Government Bond Fund           *                        0.50%
 
Money Market Fund              First $50 million        0.35%
                               Next $200 million        0.25%
                               Over $250 million        0.20%
</TABLE>
 
* For the Select Emerging Markets Fund, the Select Growth Fund, the Select
Strategic Growth Fund, and the Government Bond Fund, the investment management
fee does not vary according to the level of assets in the Fund. AFIMS' fee
computed for each Fund will be paid from the assets of such Fund. AFIMS is
solely responsible for the payment of all fees for investment management
services to the Sub-Advisers.
 
The prospectus of the Trust contains additional information concerning the
Funds, including information concerning additional expenses paid by the Funds
and paid to the Sub-Advisers, and should be read in conjunction with this
Prospectus.
 
                                       27
<PAGE>
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II FUNDS
 
For managing investments and business affairs, each Portfolio pays a monthly fee
to FMR. The prospectuses of Fidelity VIP and Fidelity VIP II contain additional
information concerning the Portfolios, including information concerning
additional expenses paid by the Portfolios, and should be read in conjunction
with this Prospectus.
 
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
 
1.  A group fee rate based on the monthly average net assets of all the mutual
    funds advised by FMR. On an annual basis, this rate cannot rise above 0.37%,
    and drops as total assets in all these funds rise.
 
2.  An individual fund fee rate of 0.45% of the Fidelity VIP High Income
    Portfolio's average net assets throughout the month.
 
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
 
The Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP Overseas and
the Fidelity VIP II Asset Manager Portfolios' fee rates are each made of two
components:
 
1.  A group fee rate based on the monthly average net assets of all of the
    mutual funds advised by FMR. On an annual basis, this rate cannot rise above
    0.52%, and drops as total assets in all these mutual funds rise.
 
2.  An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
    Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.45% for the
    Fidelity VIP Overseas Portfolio and 0.25% for the Fidelity VIP II Asset
    Manager Portfolio.
 
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
 
Thus, the Fidelity VIP High Income Portfolio may have a fee of as high as 0.82%
of its average net assets. The Fidelity VIP Equity-Income Portfolio may have a
fee of as high as 0.72% of its average net assets. The Fidelity VIP Growth
Portfolio may have a fee of as high as 0.82% of its average net assets. The
Fidelity VIP Overseas Portfolio may have a fee of as high as 0.97% of its
average net assets. The Fidelity VIP II Asset Manager Portfolio may have a fee
of as high as 0.77% of its average net assets. The actual fee rate may be less
depending on the total assets in the funds advised by FMR.
 
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
 
The Investment Adviser for the T. Rowe Price International Stock Portfolio is
Rowe Price-Fleming International, Inc. ("Price-Fleming"). Price-Fleming, founded
in 1979 as a joint venture between T. Rowe Price Associates, Inc. and Robert
Fleming Holdings, Limited, is one of America's largest international mutual fund
asset managers with approximately $30 billion under management in its offices in
Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. To cover
investment management and operating expenses, the T. Rowe Price International
Stock Portfolio pays Price-Fleming a single, all-inclusive fee of 1.05% of its
average daily net assets.
 
INVESTMENT ADVISORY SERVICES TO DGPF
 
Each Series of DGPF pays an investment adviser an annual fee for managing the
portfolios and making the investment decisions for the Series. The investment
adviser for the International Equity Series is Delaware International Advisers
Ltd. ("Delaware International"). The annual fee paid by the International Equity
Series to Delaware International is equal to 0.75% of the average daily net
assets of the Series.
 
                                       28
<PAGE>
INVESTMENT ADVISORY SERVICES TO INVESCO VIF
 
INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser for INVESCO VIF,
and is primarily responsible for providing various investment management
administration services and supervising daily business affairs. The Industrial
Income Fund and the Total Return Fund each pay INVESCO a monthly fee equal to
0.75% annually of the first $500 million of the Fund's average daily net assets;
0.65% of the next $500 million of the Fund's average net assets and 0.55% of the
Fund's average net assets in excess of $1 billion. The prospectus of INVESCO VIF
contains additional information concerning other expenses paid by the Funds.
 
               ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
 
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
 
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund, or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Certificate Owners on a basis to be determined by the Company.
 
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price, the Series of DGPF, and the Funds of INVESCO VIF are
also issued to variable annuity and variable life separate accounts of other
unaffiliated insurance companies ("mixed and shared funding"). It is conceivable
that in the future such mixed funding or shared funding may be disadvantageous
for variable life contract owners or variable annuity contract owners. Although
the Company and the Underlying Investment Companies do not currently foresee any
such disadvantages to either variable life insurance contract owners or variable
annuity contract owners, the Company and the respective Trustees intend to
monitor events in order to identify any material conflicts between such contract
owners and to determine what action, if any, should be taken in response
thereto. If the Trustees were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, the
Company will bear the attendant expenses.
 
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
 
                                 VOTING RIGHTS
 
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. If
 
                                       29
<PAGE>
the 1940 Act or any rules thereunder should be amended, or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Certificates, the Company reserves
the right to do so.
 
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
 
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
 
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as (1) to cause a change in the subclassification or investment
objective of one or more of the Underlying Funds, or (2) to approve or
disapprove an investment advisory contract for the Underlying Funds. In
addition, the Company may disregard voting instructions in favor of any change
in the investment policies or in any investment adviser or principal underwriter
initiated by Certificate Owners or the Trustees. The Company's disapproval of
any such change must be reasonable and, in the case of a change in investment
policies or investment adviser, based on a good faith determination that such
change would be contrary to state law or otherwise is inappropriate in light of
the objectives and purposes of the Underlying Funds. In the event the Company
does disregard voting instructions, a summary of and the reasons for that action
will be included in the next periodic report to Certificate Owners.
 
                                THE CERTIFICATE
 
ENROLLMENT FORM FOR A CERTIFICATE
 
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
 
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company (1) approves
the enrollment form, (2) the Certificate is delivered and accepted, and (3) the
first premium is paid.
 
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt
 
                                       30
<PAGE>
of the premium at the Principal Office. IF THE CERTIFICATE IS NOT ISSUED, THE
PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
 
If the Certificate provides for a full refund of the initial payment under its
"Right-to-Examine Certificate" provision as required in your state, all
Certificate Value in the General Account that you initially designated to go to
the Sub-Accounts will be transferred to the Sub-Account investing in the Money
Market Fund of the Trust upon Issuance and Acceptance of the Certificate. All
Certificate Value will be allocated as you have chosen not later than the
expiration of the period during which you may exercise the "Right-to-Examine
Certificate" provision. If the "Payor Provision" is in effect, (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Payor Provisions"), Payor premiums which are
not "excess premiums" will be transferred to the Monthly Deduction Sub-Account
not later than three days after underwriting approval of the Certificate.
 
FREE-LOOK PERIOD
 
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
 
When you return the Certificate, the Company will, within seven days, mail a
refund. (The refund of any premium paid by check may be delayed until the check
has cleared your bank.) If the Certificate provides for a full refund of the
initial premium under its "Right-to-Examine Certificate" provision as required
in your state, your refund will be the greater of (a) your entire premium, or
(b) the Certificate Value plus deductions under the Certificate or by the
Underlying Funds for taxes, charges or fees. If the Certificate does not provide
for a full refund of the initial premium, you will receive the Certificate Value
in the Separate Account, plus premiums paid, including fees and charges, minus
the amounts allocated to the Separate Account, plus the fees and charges imposed
on amounts in the Separate Account.
 
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but for the increase. The amount to be
credited will be refunded if you so request. The Company will also waive any
surrender charge calculated for the increase.
 
CONVERSION PRIVILEGES
 
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
 
                                       31
<PAGE>
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
 
PREMIUM PAYMENTS
 
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
 
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
 
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $50.
 
Premiums are not limited as to frequency and number. However, no premium payment
may be less than $100 without the Company's consent. Moreover, premium payments
must be sufficient to cover the next Monthly Deduction plus loan interest
accrued, or the Certificate may lapse. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
 
In no event may the total of all premiums paid exceed the current maximum
premium limitations set forth in the Certificate, if required by federal tax
laws. These maximum premium limitations will change whenever there is any change
in the Face Amount, the addition or deletion of a rider, or a change in the
Death Benefit Option. If a premium is paid which would result in total premiums
exceeding the current maximum premium limitations, the Company will only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Certificate during a
Certificate year. See CERTIFICATE TERMINATION AND REINSTATEMENT.
 
ALLOCATION OF NET PREMIUMS
 
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%. You may change the allocation of future Net
Premiums at any time pursuant to written or telephone request. If allocation
changes by telephone are elected by the Certificate Owner, a properly completed
authorization form must be on file before telephone requests will be honored.
The policy of the Company and its agents and affiliates is that they will not be
responsible for losses resulting from acting upon telephone requests reasonably
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions. The
procedures the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a
 
                                       32
<PAGE>
Certificate Owner identify themselves by name and identify the Certificate Owner
by name, date of birth and social security number. All transfer instructions by
telephone are tape recorded. An allocation change will be effective as of the
date of receipt of the notice at the Principal Office. No charge is currently
imposed for changing premium allocation instructions. The Company reserves the
right to impose such a charge in the future, but guarantees that the charge will
not exceed $25.
 
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
 
TRANSFER PRIVILEGE
 
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
 
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
 
Transfers involving the General Account are currently permitted only if:
 
(a) There has been at least a ninety (90) day period since the last transfer
    from the General Account; and
 
(b) The amount transferred from the General Account in each transfer does not
    exceed the lesser of $100,000 or 25% of the Accumulated Value under the
    Certificate.
 
These rules are subject to change by the Company.
 
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
 
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts ("Dollar Cost
Averaging Option"), or (b) to automatically reallocate Certificate Value among
the Sub-Accounts ("Automatic Rebalancing Option"). Automatic transfers may be
made on a monthly, bimonthly, quarterly, semiannual or annual schedule.
Generally, all transfers will be processed on the 15th of each scheduled month.
However, if the 15th is not a business day or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The Dollar
Cost Averaging Option and the Automatic Rebalancing Option may not be in effect
at the same time.
 
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
 
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and (4)
the maximum amount that may be transferred each time from the General Account.
 
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge.
 
                                       33
<PAGE>
Any transfers made with respect to a conversion privilege, Certificate loan or
material change in investment policy will not count towards the twelve free
transfers.
 
ELECTION OF DEATH BENEFIT OPTIONS
 
Federal tax law requires a minimum death benefit in relation to cash value for a
Certificate to qualify as life insurance. Under current federal tax law, either
the Guideline Premium test or the Cash Value Accumulation test can be used to
determine if the Certificate complies with the definition of "life insurance" in
Section 7702 of the Code. At the time of application, the Employer may elect
either of the tests.
 
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. If the Cash Value Accumulation
test is chosen by the employer, ONLY Death Benefit Option 3 will apply. Death
Benefits Option 1 and Option 2 are NOT available under the Cash Value
Accumulation test.
 
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
 
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the minimum
Death Benefit relative to the Certificate Value are different. Required
increases in the minimum Death Benefit due to growth in Certificate Value will
generally be greater under the Cash Value Accumulation test than under the
Guideline Premium test. APPLICANTS FOR A POLICY SHOULD CONSULT A QUALIFIED TAX
ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
 
OPTION 1 -- LEVEL DEATH BENEFIT
 
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Minimum Death Benefit, as set forth in the table below. Under Option 1, the
Death Benefit will remain level unless the Minimum Death Benefit is greater than
the Face Amount, in which case the Death Benefit will vary as the Certificate
Value varies. Option 1 will offer the best opportunity for the Certificate Value
under a Certificate to increase without increasing the Death Benefit as quickly
as it might under the other options. The Death Benefit will never go below the
Face Amount.
 
OPTION 2 -- ADJUSTABLE DEATH BENEFIT
 
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Minimum Death Benefit, as set forth in the
table below. The Death Benefit will, therefore, vary as the Certificate Value
changes, but will never be less than the Face Amount. Option 2 will offer the
best opportunity for the Certificate Owner who would like to have an increasing
Death Benefit as early as possible. The Death Benefit will increase whenever
there is an increase in the Certificate Value, and will decrease whenever there
is a decrease in the Certificate Value, but will never go below the Face Amount.
 
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
 
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the
 
                                       34
<PAGE>
Certificate at the "seven-pay" limit for the full seven years. When the
Certificate Value multiplied by the applicable Death Benefit Factor exceeds the
Face Amount, the Death Benefit will increase whenever there is an increase in
the Certificate Value, and will decrease whenever there is a decrease in the
Certificate Value, but will never go below the Face Amount. OPTION 3 MAY NOT BE
AVAILABLE IN ALL STATES.
 
DEATH PROCEEDS
 
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will be determined as of the date of the
Company's receipt of due proof of the Insured's death.
 
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
 
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
 
MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
 
The Minimum Death Benefit under Option 1 or Option 2 is equal to a percentage of
the Certificate Value as set forth below. The Minimum Death Benefit is
determined in accordance with the Code regulations to ensure that the
Certificate qualifies as a life insurance contract and that the insurance
proceeds may be excluded from the gross income of the Beneficiary.
 
                          MINIMUM DEATH BENEFIT TABLE
                            (Option 1 and Option 2)
 
<TABLE>
<CAPTION>
 Age of Insured                                                Percentage of
on Date of Death                                             Certificate Value
- ----------------------------------------------------------  -------------------
<S>                                                         <C>
    40 and under..........................................            250%
    45....................................................            215%
    50....................................................            185%
    55....................................................            150%
    60....................................................            130%
    65....................................................            120%
    70....................................................            115%
    75....................................................            105%
    80....................................................            105%
    85....................................................            105%
    90....................................................            105%
    95 and above..........................................            100%
</TABLE>
 
For the Ages not listed, the progression between the listed Ages is linear.
 
                                       35
<PAGE>
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND DEDUCTIONS
- -- "Monthly Deduction from Certificate Value."
 
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
 
ILLUSTRATION OF OPTION 1
 
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt. Under Option 1, a Certificate with a
$50,000 Face Amount will generally have a Death Benefit equal to $50,000.
However, because the Death Benefit must be equal to or greater than 250% of
Certificate Value, if at any time the Certificate Value exceeds $20,000, the
Death Benefit will exceed the $50,000 Face Amount. In this example, each
additional dollar of Certificate Value above $20,000 will increase the Death
Benefit by $2.50. For example, a Certificate with a Certificate Value of $35,000
will have a Minimum Death Benefit of $87,500 ($35,000 X 2.50); Certificate Value
of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X 2.50);
and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
 
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
 
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
 
ILLUSTRATION OF OPTION 2
 
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
 
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Minimum Death Benefit will be $87,500 ($35,000 X 2.50); Certificate
Value of $40,000 will produce a Minimum Death Benefit of $100,000 ($40,000 X
2.50); and Certificate Value of $50,000 will produce a Minimum Death Benefit of
$125,000 ($50,000 X 2.50).
 
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is
 
                                       36
<PAGE>
less than the Face Amount plus Certificate Value, then the Death Benefit will be
the current Face Amount plus Certificate Value.
 
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
 
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
 
CHANGE IN DEATH BENEFIT OPTION
 
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of the request. No charges will be imposed on changes in Death Benefit Options.
IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
 
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Minimum Death Benefit). The
cost of insurance may be higher or lower than it otherwise would have been since
any increases or decreases in Certificate Value will, respectively, reduce or
increase the Insurance Amount at Risk under Option 1. Assuming a positive net
investment return with respect to any amounts in the Separate Account, changing
the Death Benefit Option from Option 2 to Option 1 will reduce the Insurance
Amount at Risk and, therefore, the cost of insurance charge for all subsequent
Monthly Deductions, compared to what such charge would have been if no such
change were made. If the Death Benefit Option is changed from Option 1 to Option
2, the Face Amount will be decreased to equal the Death Benefit less the
Certificate Value on the effective date of the change. This change may not be
made if it would result in a Face Amount less than $40,000. A change from Option
1 to Option 2 will not alter the amount of the Death Benefit at the time of the
change, but will affect the determination of the Death Benefit from that point
on. Because the Certificate Value will be added to the new specified Face
Amount, the Death Benefit will vary with the Certificate Value. Thus, under
Option 2, the Insurance Amount at Risk will always equal the Face Amount unless
the Minimum Death Benefit is in effect. The cost of insurance may also be higher
or lower than it otherwise would have been without the change in Death Benefit
Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Certificate
Value."
 
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
 
CHANGE IN FACE AMOUNT
 
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
 
                                       37
<PAGE>
INCREASES
 
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured is also required whenever
the Face Amount is increased. A request for an increase in the Face Amount may
not be less than an amount determined by the Company. This amount varies by
group but in no event will this amount exceed $10,000. You may not increase the
Face Amount after the Insured reaches Age 80. An increase must be accompanied by
an additional premium if the Certificate Value is less than $50 plus an amount
equal to the sum of two Monthly Deductions. On the effective date of each
increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
 
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. A surrender charge
will also be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value" and "Surrender Charge."
 
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and (2)
during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
 
DECREASES
 
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the decrease may be limited or Certificate Value may be returned to the
Certificate Owner (at your election) to the extent necessary to meet the
requirements. A return of Certificate Value may result in tax liability to you.
 
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
 
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
 
If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
 
                                       38
<PAGE>
CERTIFICATE VALUE AND SURRENDER VALUE
 
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined. Certificate Value and Surrender Value will reflect
frequency and amount of Net Premiums paid, interest credited to accumulations in
the General Account, the investment performance of the chosen Sub-Accounts, any
partial withdrawals, any loans, any loan repayments, any loan interest paid or
credited, and any charges assessed in connection with the Certificate.
 
CALCULATION OF CERTIFICATE VALUE
 
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the period when premiums are held in
the General Account (before being transferred to the Separate Account; see THE
CERTIFICATE -- "Enrollment Form for a Certificate") less any Monthly Deductions
due. On each Valuation Date after the Date of Issue the Certificate Value will
be:
 
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
    determined for each Sub-Account by multiplying the value of a Unit in that
    Sub-Account on that date by the number of such Units allocated to the
    Certificate; plus
 
(2) the value in the General Account (including any amounts transferred to the
    General Account with respect to a loan).
 
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
 
THE UNIT
 
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
 
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
 
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
 
NET INVESTMENT FACTOR
 
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
 
                                       39
<PAGE>
(a) is the investment income of that Sub-Account for the Valuation Period, plus
    capital gains, realized or unrealized, credited during the Valuation Period;
    minus capital losses, realized or unrealized, charged during the Valuation
    Period; adjusted for provisions made for taxes, if any; and
 
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
    Period.
 
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor. Allocations to the
General Account are not converted into Units, but are credited interest at a
rate periodically set by the Company. See MORE INFORMATION ABOUT THE GENERAL
ACCOUNT.
 
PAYMENT OPTIONS
 
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
 
OPTIONAL INSURANCE BENEFITS
 
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
 
SURRENDER
 
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
 
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
 
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
 
PAID-UP INSURANCE OPTION
 
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
 
                                       40
<PAGE>
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING CERTIFICATE OWNER
RIGHTS AND BENEFITS WILL BE AFFECTED:
 
    - As described above, the Paid-Up Insurance benefit will be computed
      differently from the net Death Benefit and the Death Benefit options will
      not apply
 
    - We will not allow transfers of Certificate Value from the General Account
      back to the Separate Account
 
    - You may not make further payments
 
    - You may not increase or decrease the Face Amount or make partial
      withdrawals
 
    - Riders will continue only with our consent
 
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
 
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
 
PARTIAL WITHDRAWAL
 
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
 
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND DEDUCTIONS
- -- "Charges On Partial Withdrawal." The Company will normally pay the amount of
the partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments." For important tax consequences which may result from partial
withdrawals, see FEDERAL TAX CONSIDERATIONS.
 
                             CHARGES AND DEDUCTIONS
 
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
 
                                       41
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Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
 
PREMIUM EXPENSE CHARGE
 
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. The
premium tax charge may change when either the applicable jurisdiction changes or
the tax rate within the applicable jurisdiction changes. The Company should be
notified of any change in address of the Insured as soon as possible.
 
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 5%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
 
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
 
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See THE CERTIFICATE -- "Charge
for Change in Face Amount."
 
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses and the charge for the cost of
additional benefits provided by rider will be deducted. If the Payor Provision
is in force, all cost of insurance charges and administrative charges will be
deducted from the Monthly Deduction Sub-Account. If no allocation is specified,
the Company will make a Pro-Rata Allocation.
 
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
 
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
 
COST OF INSURANCE
 
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is
 
                                       42
<PAGE>
determined on a monthly basis, and is determined separately for the initial Face
Amount and for each subsequent increase in the Face Amount. Because the cost of
insurance depends upon a number of variables, it can vary from month to month
and from group to group.
 
CALCULATION OF THE CHARGE
 
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Minimum Death Benefit is not in effect.
 
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
 
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit Option
1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face Amount reduced by any Certificate Value
(minus rider charges) in excess of the initial Face Amount at the beginning of
the Certificate month.
 
If the Minimum Death Benefit is in effect under any Option, a monthly cost of
insurance charge will also be calculated for that portion of the Death Benefit
which exceeds the current Face Amount. This charge will be calculated by:
 
    - multiplying the cost of insurance rate applicable to the initial Face
      Amount times the Minimum Death Benefit (Certificate Value times the
      applicable percentage), minus
 
       - the greater of the Face Amount or the Certificate Value under Death
         Benefit Option 1 or Option 3, or
 
       - the Face Amount plus the Certificate Value under Death Benefit Option
         2.
 
When the Minimum Death Benefit is in effect, the cost of insurance charge for
the initial Face Amount and for any increases will be calculated as set forth in
the preceding two paragraphs.
 
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: Decreases."
 
COST OF INSURANCE RATES
 
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a guaranteed
or simplified underwriting basis. The amount of this portion will be determined
for each group, and may vary based on characteristics within the group.
 
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; the number of
persons eligible to participate in the plan; expected percentage of eligible
persons participating in the plan; and the amount of guaranteed or simplified
underwriting insurance to be issued. Larger groups, higher participation rates
and occupations with historically favorable mortality rates will generally
result in the individuals within that group being placed in a more favorable
Underwriting Class.
 
                                       43
<PAGE>
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and non-
smokers. Any change in the cost of insurance rates will apply to all persons of
the same insuring Age and Underwriting Class whose Certificates have been in
force for the same length of time.
 
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will have a lower cost of insurance than an Insured in a standard Underwriting
Class who, in turn, will have a lower cost of insurance than an Insured in a
substandard Underwriting Class with a higher mortality risk. The Underwriting
Classes may be divided into two categories or aggregated: smokers and
non-smokers. Non-smoking Insureds will incur lower cost of insurance rates than
Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
 
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
 
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
 
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
 
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
 
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
 
                                       44
<PAGE>
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
 
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
 
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. If the charge for mortality and expense risks is
not sufficient to cover actual mortality experience and expenses, the Company
will absorb the losses. If costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current profit to the Company, such profit will be available for use by the
Company for, among other things, the payment of distribution, sales and other
expenses. Since mortality and expense risks involve future contingencies which
are not subject to precise determination in advance, it is not feasible to
identify specifically the portion of the charge which is applicable to each.
 
CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
 
Because the Sub-Accounts purchase shares of the Underlying Investment Companies,
the value of the Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Investment Companies. The
prospectuses and Statements of Additional Information of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, and INVESCO VIF additional
information concerning such fees and expenses.
 
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
 
SURRENDER CHARGE
 
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
 
A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance of the Certificate is an amount up to the sum of (a) plus (b), where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of up to 50% (less
any premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. This reduction in the maximum
surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
 
                                       45
<PAGE>
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
 
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
 
The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
 
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase. See APPENDIX D -- CALCULATION
OF MAXIMUM SURRENDER CHARGES, for examples illustrating the calculation of the
maximum surrender charge for the initial Face Amount and for any increases, as
well as for the surrender charge based on actual premiums paid or associated
with any increases.
 
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
 
                                       46
<PAGE>
CHARGES ON PARTIAL WITHDRAWAL
 
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge.
 
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of withdrawal
(i.e., 15 years have passed from the Date of Issue and from the effective date
of any increase in the Face Amount).
 
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
 
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
 
    - first, the surrender charge for the most recent increase in the Face
      Amount;
 
    - second, the surrender charge for the next most recent increases
      successively;
 
    - last, the surrender charge for the initial Face Amount.
 
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
 
TRANSFER CHARGES
 
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
 
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund and Government Bond Fund of the Trust, respectively, to one or more
of the other Sub-Accounts, or (b) to reallocate Certificate Value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve free transfers allowed in each Certificate year. Each subsequent
automatic transfer is without charge and does not reduce the remaining number of
transfers which may be made without charge.
 
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account
 
                                       47
<PAGE>
will be free of charge, and in addition to the twelve free transfers in a
Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and CERTIFICATE
LOANS.
 
CHARGE FOR CHANGE IN FACE AMOUNT
 
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
 
OTHER ADMINISTRATIVE CHARGES
 
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
 
                               CERTIFICATE LOANS
 
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS
- --"Postponement of Payments."
 
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
 
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
 
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The current
credited rate is 7.1%; 8% for preferred loans. NO ADDITIONAL INTEREST WILL BE
CREDITED TO SUCH CERTIFICATE VALUE.
 
PREFERRED LOAN OPTION
 
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth Certificate anniversary,
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. The
Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
 
There is some uncertainty as to the tax treatment of preferred loans. Consult a
qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN
OPTION IS NOT AVAILABLE IN ALL STATES.
 
LOAN INTEREST CHARGED
 
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the
 
                                       48
<PAGE>
loan amount, if the new loan amount exceeds the Certificate Value in the General
Account, the Company will transfer Certificate Value equal to that excess loan
amount from the Certificate Value in each Sub-Account to the General Account as
security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Certificate
Value in each Sub-Account bears to the total Certificate Value in all
Sub-Accounts.
 
REPAYMENT OF DEBT
 
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate Account cannot exceed Certificate Value previously transferred from
the Separate Account to secure the Debt.
 
If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
 
EFFECT OF CERTIFICATE LOANS
 
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
 
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
 
                   CERTIFICATE TERMINATION AND REINSTATEMENT
 
TERMINATION
 
The failure to make premium payments will not cause the Certificate to lapse
unless:
 
    - the Surrender Value is insufficient to cover the next Monthly Deduction
      plus loan interest accrued; or
 
    - if Debt exceeds the Certificate Value.
 
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
 
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
 
PAYOR PROVISIONS
 
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
 
                                       49
<PAGE>
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
 
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of premium which is due.
The premium may be paid during a grace period of 62 days, beginning on the
premium due date. If the necessary premium is not received by the Company within
31 days of the end of the grace period, a second notice will be sent to the
Payor. A 31-day grace period notice at this time will also be sent to you if the
Certificate Value is insufficient to cover the Monthly Deductions then due.
 
If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
 
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
 
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
 
REINSTATEMENT
 
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
 
    - a written enrollment form for reinstatement,
 
    - Evidence of Insurability; and
 
    - a premium that, after the deduction of the premium expense charge, is
      large enough to cover the Monthly Deductions for the three-month period
      beginning on the date of reinstatement.
 
SURRENDER CHARGE
 
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
 
CERTIFICATE VALUE ON REINSTATEMENT
 
The Certificate Value on the date of reinstatement is:
 
    - the Net Premium paid to reinstate the Certificate increased by interest
      from the date the payment was received at the Principal Office; PLUS
 
    - an amount equal to the Certificate Value less Debt on the date of default;
      MINUS
 
                                       50
<PAGE>
    - the Monthly Deduction due on the date of reinstatement. You may reinstate
      any Debt outstanding on the date of default or foreclosure.
 
                          OTHER CERTIFICATE PROVISIONS
 
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
 
CERTIFICATE OWNER
 
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while the
Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
is required whenever the Face Amount of insurance is increased.
 
BENEFICIARY
 
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
 
ASSIGNMENT
 
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
 
INCONTESTABILITY
 
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
 
SUICIDE
 
The Death Proceeds will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Certificate, without interest, less
any outstanding Debt and less any partial withdrawals. If the Insured commits
suicide, within two years from the effective date of any increase in the Death
Benefit, the Company's liability with respect to such increase will be limited
to a refund of the cost thereof. The Beneficiary will receive the administrative
charges and insurance charges paid for such increase.
 
                                       51
<PAGE>
AGE
 
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
 
POSTPONEMENT OF PAYMENTS
 
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers may be postponed whenever: (1) the New York Stock Exchange is
closed other than customary weekend and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the SEC, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Certificate of
any amounts derived from the premiums paid by check may be delayed until such
time as the check has cleared your bank.
 
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
 
                                       52
<PAGE>
                DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
 
<TABLE>
<CAPTION>
NAME AND POSITION
WITH COMPANY                            PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ---------------------------------  ---------------------------------------------------------
<S>                                <C>
Bruce C. Anderson                  Director (since 1996) and Vice President (since 1984) of
  Director and Vice President      First Allmerica
 
Abigail M. Armstrong               Secretary (since 1996) and Counsel (since 1991) of First
  Secretary and Counsel            Allmerica
 
Robert E. Bruce                    Director and Chief Information Officer (since 1997), Vice
  Director, Vice President and     President (since 1995) of First Allmerica; and Corporate
  Chief Information Officer        Manager (1979 to 1995) of Digital Equipment Corporation
 
John P. Kavanaugh
  Director, Vice President and     Director and Chief Investment Officer (since 1996) and
  Chief Investment Officer         Vice President (since 1991) of First Allmerica
 
John F. Kelly
  Director, Senior Vice
  President,                       Director (since 1996), General Counsel (since 1981),
  General Counsel and Assistant    Senior Vice President (since 1986), and Assistant
  Secretary                        Secretary (since 1986) of First Allmerica
 
J. Barry May                       Director (since 1996) of First Allmerica; Director and
  Director                         President (since 1996), Vice President (1993 to 1996) and
                                   General Manager (1989 to 1993) of The Hanover Insurance
                                   Company
 
James R. McAuliffe                 Director (since 1996) of First Allmerica; Director (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 Executive    Director, Chairman of the Board, President and Chief
  Officer                          Executive Officer (since 1989) of First Allmerica
 
Edward J. Parry, III
  Director, Vice President,        Director and Chief Financial Officer (since 1996), Vice
  Chief Financial Officer and      President and Treasurer (since 1993), and Assistant Vice
  Treasurer                        President (1992 to 1993) of First Allmerica
 
Richard M. Reilly                  Director (since 1996), Vice President (since 1990) of
  Director and Vice President      First Allmerica; Director (since 1990) of Allmerica
                                   Investments, Inc.; and Director and President (since
                                   1990) of Allmerica Financial Investment Management
                                   Services, Inc.
 
Eric A. Simonsen                   Director (since 1996), Vice President (since 1990), and
  Director and Vice President      Chief Financial Officer (1990 to 1996) of First Allmerica
 
Phillip E. Soule                   Director (since 1996) and Vice President (since 1987) of
  Director and Vice President      First Allmerica
</TABLE>
 
                                       53
<PAGE>
                                  DISTRIBUTION
 
Allmerica Investments, Inc., an indirect subsidiary of the Company, acts as the
principal underwriter of the Certificates pursuant to a Sales and Administrative
Services Agreement with the Company and the Separate Account. Allmerica
Investments, Inc. is registered with the SEC as a broker-dealer and is a member
of the National Association of Securities Dealers ("NASD"). The Certificates are
sold by agents of the Company who are registered representatives of Allmerica
Investments, Inc., or of independent broker-dealers.
 
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issue of a
Certificate or an increase in the Face Amount, commissions may be up to 25% of
the first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 2.5% of first-year,
or 4% of renewal premiums. To the extent permitted by NASD rules, promotional
incentives or payments may also be provided to broker-dealers based on sales
volumes, the assumption of wholesaling functions or other sales related
criteria. Other payments may be made for other services that do not directly
involve the sales of the Certificates. These services may include the
recruitment and training of personnel, production of promotional literature, and
similar services.
 
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges, through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
 
                                    SERVICES
 
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Policyowners. Currently, the Company receives service fees with respect to
the Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio,
Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity
VIP II Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net
asset value, respectively, of the shares of such Underlying Funds held by the
Separate Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Separate Account.
The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
 
                                    REPORTS
 
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you. The annual
statement will summarize all of the above transactions and deductions of charges
during the Certificate year. It will also set forth the status of
 
                                       54
<PAGE>
the Death Proceeds, Certificate Value, Surrender Value, amounts in the
Sub-Accounts and General Account, and any Certificate loan(s).
 
In addition, you will be sent periodic reports containing financial statements
and other information for the Separate Account and the Underlying Investment
Companies as required by the 1940 Act.
 
                               LEGAL PROCEEDINGS
 
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
 
                              FURTHER INFORMATION
 
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
 
                            INDEPENDENT ACCOUNTANTS
 
The financial statements of the Company as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, and the financial
statements of the Group VEL Account of the Company as of December 31, 1997 and
for the periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
 
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Certificates.
 
                           FEDERAL TAX CONSIDERATIONS
 
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
 
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
 
THE COMPANY AND THE SEPARATE ACCOUNT
 
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account. Based on these expectations,
no charge is made for federal income taxes which may be attributable to the
Separate Account.
 
                                       55
<PAGE>
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
 
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
 
TAXATION OF THE CERTIFICATES
 
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See MODIFIED ENDOWMENT CONTRACTS.
 
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
 
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
 
CERTIFICATE LOANS
 
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may revoke your
request for a preferred loan.
 
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax
 
                                       56
<PAGE>
deduction for interest is allowed on policy or certificate loans, if the insured
is an officer or employee of, or is financially interested in, any business
carried on by the taxpayer. There is an exception to this rule which permits a
deduction for interest on loans up to $50,000 related to any policies or
certificates covering the greater of (1) five individuals, or (2) the lesser of
(a) 5% of the total number of officers and employees of the corporation, or (b)
20 individuals.
 
MODIFIED ENDOWMENT CONTRACTS
 
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level premiums.
 
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any 12-month period will be treated as a single
modified endowment contract in determining taxable distributions.
 
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
 
                   MORE INFORMATION ABOUT THE GENERAL ACCOUNT
 
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the Certificate and the General
Account may, however, be subject to certain generally applicable provisions of
the Federal Securities Laws concerning the accuracy and completeness of
statements made in prospectuses.
 
GENERAL DESCRIPTION
 
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
 
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
 
                                       57
<PAGE>
GENERAL ACCOUNT VALUE
 
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
 
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
 
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
 
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General Account, plus interest at the
Guaranteed Minimum Rate, plus any excess interest which the Company credits,
less the sum of all Certificate charges allocable to the General Account and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
 
THE CERTIFICATE
 
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
 
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND CERTIFICATE LOANS
 
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate. Partial withdrawals are made on a
last-in/first-out basis from Certificate Value allocated to the General Account.
 
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
 
Certificate loans may also be made from the Certificate Value in the General
Account.
 
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
 
                                       58
<PAGE>
                              FINANCIAL STATEMENTS
 
Financial Statements for the Company and for the Separate Account are included
in this Prospectus beginning immediately after this section. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account.
 
                                       59
<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
 
                                      F-5
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy benefits, certain future
expenses and taxes and for 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.
 
                                      F-6
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
 
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
 
Policy loans are carried principally at unpaid principal balances.
 
During 1997, the Company 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-7
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
F.  DEFERRED POLICY ACQUISITION COSTS
 
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
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
 
                                      F-8
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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 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.
 
                                      F-9
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
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
 
                                      F-10
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
2.  SIGNIFICANT TRANSACTIONS
 
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative dividends at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from the
offering of approximately $296.3 million are intended to fund a portion of the
acquisition of the 24.2 million publicly-held shares of APY pursuant to an
Agreement and Plan of Merger dated February 19, 1997.
 
The merger of APY and a wholly-owned subsidiary of AFC was consummated on July
16, 1997. Through the merger, AFC acquired all of the outstanding common stock
of APY that FAFLIC did not already own in exchange for cash of $425.6 million
and approximately 9.7 million shares of AFC stock valued at $372.5 million. At
consummation of this transaction AFC owned 59.5% through FAFLIC and 40.5%
directly.
 
The merger has been accounted for as a purchase by AFC. Total consideration of
approximately $798.1 million has been allocated to the minority interest in the
assets and liabilities based on estimates of their fair values. The minority
interest acquired totaled $703.5 million. A total of $90.6 million representing
the excess of the purchase price over the fair values of the net assets
acquired, net of deferred taxes, has been allocated to goodwill and is being
amortized over a 40-year period.
 
The pushdown of goodwill to APY resulted in an increase to the consolidated
equity of FAFLIC of $61.3 million as additional paid in capital. The effects of
this transaction on the 1997 results of the Company are as follows:
 
<TABLE>
<CAPTION>
                                                                                                 INCREASE (DECREASE)
                                                                                                 -------------------
<S>                                                                                              <C>
Revenue........................................................................................       $    (6.7)
                                                                                                          -----
                                                                                                          -----
Realized capital gains included in revenue.....................................................       $    (4.9)
                                                                                                          -----
                                                                                                          -----
Net income.....................................................................................       $    (6.1)
                                                                                                          -----
                                                                                                          -----
Unrealized appreciation on investments.........................................................       $     4.4
                                                                                                          -----
                                                                                                          -----
</TABLE>
 
In December 1997, APY redeemed 5,735.3 shares of its issued and outstanding
common stock owned by AFC for $195 million in cash and securities. The effect of
this transaction was to increase FAFLIC's ownership of APY by 6.3%.
 
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
 
                                      F-11
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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 $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.
 
                                      F-12
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
                                                               1997
                                          -----------------------------------------------
                                                        GROSS         GROSS
DECEMBER 31                               AMORTIZED   UNREALIZED   UNREALIZED      FAIR
(IN MILLIONS)                             COST (1)      GAINS        LOSSES       VALUE
- ----------------------------------------  ---------   ----------   -----------   --------
<S>                                       <C>         <C>          <C>           <C>
U.S. Treasury securities and U.S.
 government and agency securities.......  $   265.3     $  9.5       $  0.9      $  273.9
States and political subdivisions.......    2,200.6       78.3          3.1       2,275.8
Foreign governments.....................      110.8        8.5          2.2         117.1
Corporate fixed maturities..............    4,041.6      175.1         12.2       4,204.5
Mortgage-backed securities..............      374.5        9.7          2.0         382.2
                                          ---------   ----------   -----------   --------
Total fixed maturities..................  $ 6,992.8     $281.1       $ 20.4      $7,253.5
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
Equity securities.......................  $   341.1     $141.9       $  4.0      $  479.0
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
 
<CAPTION>
 
                                                               1996
                                          -----------------------------------------------
                                                        GROSS         GROSS
DECEMBER 31                               AMORTIZED   UNREALIZED   UNREALIZED      FAIR
(IN MILLIONS)                             COST (1)      GAINS        LOSSES       VALUE
- ----------------------------------------  ---------   ----------   -----------   --------
<S>                                       <C>         <C>          <C>           <C>
U.S. Treasury securities and U.S.
 government and agency securities.......  $   273.6     $  9.3       $  1.6      $  281.3
States and political subdivisions.......    2,236.9       48.5          7.7       2,277.7
Foreign governments.....................      108.0        7.3        --            115.3
Corporate fixed maturities..............    4,277.5      140.3         15.7       4,402.1
Mortgage-backed securities..............      383.1        4.7          2.7         385.1
                                          ---------   ----------   -----------   --------
Total fixed maturities..................  $ 7,279.1     $210.1       $ 27.7      $7,461.5
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
Equity securities.......................  $   327.9     $148.9       $  3.7      $  473.1
                                          ---------   ----------   -----------   --------
                                          ---------   ----------   -----------   --------
</TABLE>
 
(1) Amortized cost for fixed maturities and cost for equity securities.
 
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1997, the amortized cost and market 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
 
                                      F-13
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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-14
<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-15
<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-16
<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.
 
                                      F-17
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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 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>
 
                                      F-18
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.  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
 
                                      F-19
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
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>
 
                                      F-20
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
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.
 
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.
 
                                      F-21
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
FIXED MATURITIES
 
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
 
EQUITY SECURITIES
 
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
 
MORTGAGE LOANS
 
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
 
POLICY LOANS
 
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
 
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-22
<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-23
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                      1997       1996
- -----------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                              <C>        <C>
Revenues
  Premiums.....................................................................................  $    58.3  $    61.7
  Net investment income........................................................................       53.4       52.6
  Realized investment loss.....................................................................        1.3       (0.7)
                                                                                                 ---------  ---------
Total revenues.................................................................................      113.0      113.6
                                                                                                 ---------  ---------
Benefits and expenses
  Policy benefits..............................................................................      100.5      101.2
  Policy acquisition expenses..................................................................        3.0        3.2
  Other operating expenses.....................................................................        0.4        0.6
                                                                                                 ---------  ---------
Total benefits and expenses....................................................................      103.9      105.0
                                                                                                 ---------  ---------
Contribution from the Closed Block.............................................................  $     9.1  $     8.6
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
Cash flows
  Cash flows from operating activities:
    Contribution from the Closed Block.........................................................  $     9.1  $     8.6
    Initial cash transferred to the Closed Block...............................................     --         --
    Change in deferred policy acquisition costs, net...........................................        2.9        3.4
    Change in premiums and other receivables...................................................     --            0.2
    Change in policy liabilities and accruals..................................................      (11.6)     (13.9)
    Change in accrued investment income........................................................        0.2        2.3
    Deferred Taxes.............................................................................       (5.1)       1.0
    Change in other assets.....................................................................       (2.9)      (1.6)
    Change in expenses and taxes payable.......................................................       (2.0)       1.7
    Other, net.................................................................................       (1.2)       1.4
                                                                                                 ---------  ---------
Net cash (used in) provided by operating activities............................................      (10.6)       3.1
                                                                                                 ---------  ---------
  Cash flows from investing activities:
    Sales, maturities and repayments of investments............................................      161.6      188.1
    Purchases of investments...................................................................     (161.4)    (196.9)
    Other, net.................................................................................       11.4       12.2
                                                                                                 ---------  ---------
Net cash provided by (used in) investing activities............................................       11.6        3.4
                                                                                                 ---------  ---------
Net increase in cash and cash equivalents......................................................        1.0        6.5
Cash and cash equivalents, beginning of year...................................................       24.1       17.6
                                                                                                 ---------  ---------
Cash and cash equivalents, end of year.........................................................  $    25.1  $    24.1
                                                                                                 ---------  ---------
                                                                                                 ---------  ---------
</TABLE>
 
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans in the Closed Block at December 31, 1997 or 1996, respectively.
 
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
 
                                      F-24
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
7.  DEBT
 
Short- and long-term debt consisted of the following:
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                        1997       1996
- -------------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                                <C>        <C>
Short-Term
  Commercial paper...............................................................................  $    33.0  $    37.8
  Other..........................................................................................     --            0.6
                                                                                                   ---------  ---------
Total short-term debt............................................................................  $    33.0  $    38.4
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
Long-term debt...................................................................................  $     2.6  $     2.7
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by various lines of credit. At December 31, 1997, the weighted average
interest rate for outstanding commercial paper was approximately 5.8%.
 
At December 31, 1997, AFC had approximately $140.0 million in committed lines of
credit provided by U.S. banks, of which $107.2 million was available for
borrowing. These lines of credit generally have terms of less than one year, and
require the Company to pay annual commitment fees limited to 0.07% of the
available credit. Interest that would be charged for usage of these lines of
credit is based upon negotiated arrangements.
 
During 1996, the Company utilized repurchase agreements to finance certain
investments. These repurchase agreements were settled by the end of 1996.
 
In October, 1995, AFC issued $200.0 million face amount of Senior Debentures for
proceeds of $197.2 million net of discounts and issuance costs. These securities
have an effective interest rate of 7.65%, and mature on October 16, 2025.
Interest is payable semiannually on October 15 and April 15 of each year. The
Senior Debentures are subject to certain restrictive covenants, including
limitations on issuance of or disposition of stock of restricted subsidiaries
and limitations on liens. AFC is in compliance with all covenants. The primary
source of cash for repayment of the debt by AFC is dividends from FAFLIC and
APY.
 
Interest expense was $3.6 million, $16.8 million and $4.3 million in 1997, 1996
and 1995, respectively. Interest paid on the credit agreement during 1997 was
approximately $2.8 million. Interest expense during 1996 also included $11.0
million related to interest payments on repurchase agreements. All interest
expense is recorded in other operating expenses.
 
8.  FEDERAL INCOME TAXES
 
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                            1997       1996       1995
- -------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Federal income tax expense (benefit)
  Current............................................................................  $    83.3  $    96.8  $   119.7
  Deferred...........................................................................       14.2      (15.7)     (37.0)
                                                                                       ---------  ---------  ---------
Total................................................................................  $    97.5  $    81.1  $    82.7
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
                                      F-25
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The federal income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before federal
income taxes by the expected federal income tax rate. The sources of the
difference and the tax effects of each were as follows:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                            1997       1996       1995
- -------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Expected federal income tax expense..................................................  $   131.8  $   122.3  $   105.6
  Tax-exempt interest................................................................      (37.9)     (35.3)     (32.2)
  Differential earnings amount.......................................................          -      (10.2)      (7.6)
  Dividend received deduction........................................................       (3.2)      (1.6)      (4.0)
  Changes in tax reserve estimates...................................................        7.8        4.7       19.3
  Other, net.........................................................................       (1.0)       1.2        1.6
                                                                                       ---------  ---------  ---------
Federal income tax expense...........................................................  $    97.5  $    81.1  $    82.7
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
Until conversion to a stock life insurance company, FAFLIC, as a mutual company,
reduced its deduction for policyholder dividends by the differential earnings
amount. This amount was computed, for each tax year, by multiplying the average
equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual mutual life insurance companies' earnings rate
issued by the IRS in 1996. As a stock life company, FAFLIC is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount.
 
The deferred income tax liability (asset) represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. As a result of the purchase discussed in Note 2, all companies
will file a single consolidated federal income tax return for tax years ending
on and after December 31, 1997. Deferred tax amounts presented for 1996 reflect
the combination of the former FAFLIC/ AFLIAC consolidated group with the former
APY consolidated group. Its components were as follows:
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                    1997       1996
- ---------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                            <C>        <C>
Deferred tax (assets) liabilities
  AMT carryforwards..........................................................................  $   (15.6) $   (16.3)
  Loss reserve discounting...................................................................     (391.6)    (355.1)
  Deferred acquisition costs.................................................................      291.8      249.4
  Employee benefit plans.....................................................................      (48.0)     (41.4)
  Investments, net...........................................................................      175.4      128.5
  Bad debt reserve...........................................................................      (14.3)     (26.2)
  Other, net.................................................................................       15.2       (5.8)
                                                                                               ---------  ---------
Deferred tax (asset) liability, net..........................................................  $    12.9  $   (66.9)
                                                                                               ---------  ---------
                                                                                               ---------  ---------
</TABLE>
 
Gross deferred income tax assets totaled $469.5 million and $444.8 million at
December 31, 1997 and 1996, respectively. Gross deferred income tax liabilities
totaled $482.4 million and $377.9 million at December 31, 1997 and 1996,
respectively.
 
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1997, there are available alternative
minimum tax credit carryforwards of $15.6 million.
 
                                      F-26
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the FAFLIC/ AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
former Allmerica P&C consolidated group's federal income tax returns through
1991. The Company has appealed certain adjustments proposed by the IRS with
respect to the federal income tax returns for 1989, 1990, and 1991 for both the
FAFLIC/AFLIAC consolidated group as well as the former Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
 
9.  PENSION PLANS
 
FAFLIC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Effective January 1, 1995, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee based on a percentage
of that employee's salary, similar to a defined contribution plan arrangement.
The 1997 and 1996 allocations were based on 7.0% of each eligible employee's
salary. In addition to the cash balance allocation, certain transition group
employees, who have met specified age and service requirements as of December
31, 1994, are eligible for a grandfathered benefit based primarily on the
employees' years of service and compensation during their highest five
consecutive plan years of employment. The Company's policy for the plans is to
fund at least the minimum amount required by the Employee Retirement Income
Security Act of 1974.
 
Components of net pension expense were as follows:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                             1997       1996       1995
- --------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                     <C>        <C>        <C>
Service cost -- benefits earned during the year.......................................  $    19.9  $    19.0  $    19.7
Interest accrued on projected benefit obligations.....................................       23.5       21.9       21.1
Actual return on assets...............................................................      (64.0)     (42.2)     (89.3)
Net amortization and deferral.........................................................       29.0        9.3       66.1
                                                                                        ---------  ---------  ---------
Net pension expense...................................................................  $     8.4  $     8.0  $    17.6
                                                                                        ---------  ---------  ---------
                                                                                        ---------  ---------  ---------
</TABLE>
 
                                      F-27
<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-28
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The plan changes, effective January 1, 1996, resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
 
The plans' funded status reconciled with amounts recognized in the Company's
consolidated balance sheet were as follows:
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                                     1997       1996
- ----------------------------------------------------------------------------------------------  ---------  ---------
<S>                                                                                             <C>        <C>
Accumulated postretirement benefit obligation:
  Retirees....................................................................................  $    40.7  $    40.4
  Fully eligible active plan participants.....................................................        7.0        7.5
  Other active plan participants..............................................................       24.1       24.4
                                                                                                ---------  ---------
                                                                                                     71.8       72.3
Plan assets at fair value.....................................................................     --         --
                                                                                                ---------  ---------
Accumulated postretirement benefit obligation in excess of plan assets........................       71.8       72.3
Unrecognized prior service benefit............................................................       15.3       23.8
Unrecognized loss.............................................................................       (0.8)      (5.0)
                                                                                                ---------  ---------
Accrued postretirement benefit costs..........................................................  $    86.3  $    91.1
                                                                                                ---------  ---------
                                                                                                ---------  ---------
</TABLE>
 
The components of net periodic postretirement benefit expense were as follows:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                               1997       1996       1995
- ----------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                       <C>        <C>        <C>
Service cost............................................................................  $     3.0  $     3.2  $     4.2
Interest cost...........................................................................        4.6        4.6        6.9
Amortization of gain....................................................................       (2.8)      (2.8)      (0.5)
                                                                                          ---------  ---------  ---------
Net periodic postretirement benefit expense.............................................  $     4.8  $     5.0  $    10.6
                                                                                          ---------  ---------  ---------
                                                                                          ---------  ---------  ---------
</TABLE>
 
As a result of AFC's purchase of the minority shares of APY, certain
postretirement liabilities were reduced by $6.1 million to reflect their fair
value as of the purchase date.
 
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1997, health care costs were assumed to increase 8.0% in 1998,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1997
by $4.9 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1997 by $0.6 million.
 
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1997 and 1996.
 
As described in Note 9, all of the postretirement benefit plans of the Company
were merged with the existing plans of FAFLIC, effective January 1, 1998.
 
                                      F-29
<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-30
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
12.  SEGMENT INFORMATION
 
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Accumulation. Within these broad areas, the
Company conducts business principally in five operating segments.
 
The Risk Management group includes two segments: Regional Property and Casualty
and Corporate Risk Management Services.
 
The Regional Property and Casualty segment includes property and casualty
insurance products, such as automobile insurance, homeowners insurance,
commercial multiple-peril insurance, and workers' compensation insurance. These
products are offered by Allmerica P&C through its operating subsidiaries,
Hanover and Citizens. Substantially all of the Regional Property and Casualty
segment's earnings are generated in Michigan and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine). The Corporate Risk Management Services segment includes group life and
health insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
 
The Retirement and Asset Accumulation group includes three segments: Allmerica
Financial Services, Institutional Services and Allmerica Asset Management. The
Allmerica Financial Services segment includes variable annuities, variable
universal life-type, traditional and health insurance products distributed via
retail channels to individuals across the country. The Institutional Services
segment includes primarily group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to institutions
across the country via work-site marketing and other arrangements. Allmerica
Asset Management is a Registered Investment Advisor which provides investment
advisory services primarily to affiliates and to other institutions, such as
insurance companies and pension plans.
 
Summarized below is financial information with respect to business segments for
the year ended and as of December 31.
 
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS)                                                                   1997        1996        1995
- ---------------------------------------------------------------------------  ----------  ----------  ----------
<S>                                                                          <C>         <C>         <C>
Revenues:
  Risk Management
    Regional Property and Casualty.........................................  $  2,275.3  $  2,196.6  $  2,109.0
    Corporate Risk Management..............................................       396.3       361.5       328.5
                                                                             ----------  ----------  ----------
    Subtotal...............................................................     2,671.6     2,558.1     2,437.5
  Retirement and Asset Accumulation
    Allmerica Financial Services...........................................       470.6       450.9       487.1
    Institutional Services.................................................       243.4       270.7       330.2
    Allmerica Asset Management.............................................         8.7         8.8         4.4
                                                                             ----------  ----------  ----------
    Subtotal...............................................................       722.7       730.4       821.7
  Eliminations.............................................................       (10.1)       (8.7)       (4.4)
                                                                             ----------  ----------  ----------
Total......................................................................  $  3,384.2  $  3,279.8  $  3,254.8
                                                                             ----------  ----------  ----------
                                                                             ----------  ----------  ----------
</TABLE>
 
                                      F-31
<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-32
<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-33
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                      1997       1996       1995
- -------------------------------------------------------------------------------  ---------  ---------  ---------
Property and casualty benefits, claims, losses and loss adjustment expenses:
<S>                                                                              <C>        <C>        <C>
  Direct.......................................................................  $ 1,464.9  $ 1,299.8  $ 1,383.3
  Assumed......................................................................      101.2       85.8      146.1
  Ceded........................................................................     (120.6)      (2.2)    (229.1)
                                                                                 ---------  ---------  ---------
Net policy benefits, claims, losses, and loss adjustment expenses..............  $ 1,445.5  $ 1,383.4  $ 1,300.3
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
</TABLE>
 
15.  DEFERRED POLICY ACQUISITION COSTS
 
The following reflects changes to the deferred policy acquisition asset:
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                         1997       1996       1995
- ----------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                 <C>        <C>        <C>
Balance at beginning of year......................................................  $   822.7  $   735.7  $   802.8
  Acquisition expenses deferred...................................................      617.7      560.8      504.8
  Amortized to expense during the year............................................     (476.0)    (483.5)    (470.3)
  Adjustment to equity during the year............................................      (11.1)       9.7      (50.4)
  Transferred to the Closed Block.................................................         --         --      (24.8)
  Adjustment for cession of term life insurance...................................         --         --      (26.4)
  Adjustment for cession of disability income insurance...........................      (38.6)        --         --
  Adjustment for revision of universal and variable universal life insurance
    mortality assumptions.........................................................       50.8         --         --
                                                                                    ---------  ---------  ---------
Balance at end of year............................................................  $   965.5  $   822.7  $   735.7
                                                                                    ---------  ---------  ---------
                                                                                    ---------  ---------  ---------
</TABLE>
 
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
 
16.  LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
 
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
 
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$533.6 million, $471.7 million and $446.9 million at December 31, 1997, 1996 and
1995, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were decreased by $0.2 million and $0.6 million in 1997 and
1996, respectively, and increased by $17.6 million in 1995. Unfavorable
development in the accident and health business during 1995 was primarily due to
reserve strengthening and adverse experience in the Company's individual
disability line of business. Effective October 1, 1997, the Company ceded
substantially all of its individual disability income line of business, under a
100% coinsurance agreement to Metropolitan Life Insurance Company. At December
31, 1997, the individual disability income reserves ceded under this agreement
were $249.0 million, representing 46.7% of the Company's total accident and
health reserves.
 
                                      F-34
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
 
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)                                                                      1997       1996       1995
- -------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                              <C>        <C>        <C>
Reserve for losses and LAE, beginning of the year..............................  $ 2,744.1  $ 2,896.0  $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
  Provision for insured events of the current year.............................    1,564.1    1,513.3    1,427.3
  Decrease in provision for insured events of prior years......................     (127.9)    (141.4)    (137.6)
                                                                                 ---------  ---------  ---------
Total incurred losses and LAE..................................................    1,436.2    1,371.9    1,289.7
                                                                                 ---------  ---------  ---------
Payments, net of reinsurance recoverable:
  Losses and LAE attributable to insured events of current year................      775.1      759.6      652.2
  Losses and LAE attributable to insured events of prior years.................      732.1      627.6      614.3
                                                                                 ---------  ---------  ---------
Total payments.................................................................    1,507.2    1,387.2    1,266.5
                                                                                 ---------  ---------  ---------
Change in reinsurance recoverable on unpaid losses.............................      (50.2)    (136.6)      51.1
                                                                                 ---------  ---------  ---------
Other(1)                                                                              (7.5)        --         --
                                                                                 ---------  ---------  ---------
Reserve for losses and LAE, end of year........................................  $ 2,615.4  $ 2,744.1  $ 2,896.0
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
</TABLE>
 
(1) Includes purchase accounting adjustments.
 
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $127.9 million,
$141.4 million and $137.6 million in 1997, 1996 and 1995, respectively.
 
The decrease in favorable development on prior years' reserves of $13.5 million
in 1997 results primarily from a $24.6 million decrease in favorable development
at Hanover to $58.4 million, partially offset by an $11.1 million increase in
favorable development at Citizens to $69.5 million. The decrease in Hanover's
favorable development of $24.6 million in 1997 reflects a decrease in favorable
development of $25.0 million, to $17.4 million in the personal automobile line,
as well as a decrease in favorable development of $8.5 million, to unfavorable
development of $2.8 million in the commercial multiple peril line. These
decreases were partially offset by an increase in favorable development in the
workers' compensation line of $11.5 million, to $28.8 million. The increase in
favorable development at Citizens in 1997 reflects improved severity in the
workers' compensation line where favorable development increased $13.9 million,
to $35.7 million and in the commercial multiple peril line where favorable
development increased $7.0 million to $4.3 million, partially offset by less
favorable development in the personal automobile line, where favorable
development decreased $10.5 million to $22.5 million in 1997.
 
The increase in favorable development on prior years' reserves of $3.8 million
in 1996 results primarily from an $11.4 million increase in favorable
development at Citizens. The increase in Citizens' favorable development of
$11.4 million in 1996 reflects improved severity in the personal automobile
line, where favorable development increased $28.6 million to $33.0 million in
1996, partially offset by less favorable development in the workers'
compensation line of $10.9 million Hanover's favorable development, including
voluntary and involuntary pools, decreased $7.7 million in 1996 to $82.9
million, primarily attributable to a decrease in favorable development in the
workers' compensation line of $19.8 million. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
 
                                      F-35
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
Citizens' favorable development in 1997 primarily reflects a modest shift over
the past few years of the workers' compensation business to Western and Northern
Michigan, which have demonstrated more favorable loss experience than Eastern
Michigan.
 
Citizens' favorable development in 1996 and 1995 primarily reflects the
initiatives taken by the Company to manage medical costs in both the automobile
and workers' compensation lines, as well as the impact of the Michigan Supreme
Court ruling on workers' compensation indemnity payments in 1995, which
decreases the maximum amount to be paid for indemnity cases on all existing and
future claims.
 
Hanover's favorable development from 1995 to 1997 primarily reflects favorable
legislation related to workers' compensation, improved safety features in
automobiles, improved driving habits and a moderation of medical costs and
inflation.
 
In 1995, Hanover's favorable development was primarily attributable to a
re-estimate of reserves with respect to certain types of workers' compensation
policies including large deductibles and excess of loss policies. In addition,
during 1995 Hanover refined its estimation of unallocated loss adjustment
expenses which increased favorable development in that year.
 
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
 
Due to the nature of the business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE were $53.1
million and $50.8 million, net of reinsurance of $15.7 million and $20.2 million
at the end of 1997 and 1996, respectively. The Regional Property and Casualty
subsidiaries do not specifically underwrite policies that include this coverage,
but as case law expands policy provisions and insurers' liability beyond the
intended coverage, the Regional Property and Casualty subsidiaries may be
required to defend such claims. Due to their unusual nature and absence of
historical claims data, reserves for these claims are not determined using
historical experience to project future losses. The Company estimated its
ultimate liability for these claims based upon currently known facts, reasonable
assumptions where the facts are not known, current law and methodologies
currently available. Although these claims are not material, their existence
gives rise to uncertainty and is discussed because of the possibility, however
remote, that they may become material. The Company believes that,
notwithstanding the evolution of case law expanding liability in environmental
claims, recorded reserves related to these claims for environmental liability
are adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
 
17.  MINORITY INTEREST
 
The Company's interest in Allmerica P&C is represented by ownership of 65.8%,
59.5% and 58.3% of the outstanding shares of common stock at December 31, 1997,
1996 and 1995, respectively. Earnings and shareholder's equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
 
                                      F-36
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
18.  CONTINGENCIES
 
REGULATORY AND INDUSTRY DEVELOPMENTS
 
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
 
LITIGATION
 
In July 1997, a lawsuit was instituted in Louisiana against AFC and certain of
its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive
acts, breach of contract, misrepresentation and related claims in the sale of
life insurance policies. In October 1997, plaintiffs voluntarily dismissed the
Louisiana suit and refiled the action in Federal District Court in Worcester,
Massachusetts. The plaintiffs seek to be certified as a class. The case is in
early stages of discovery and the Company is evaluating the claims. Although the
Company believes it has meritorious defenses to plaintiffs' claims, there can be
no assurance that the claims will be resolved on a basis which is satisfactory
to the Company.
 
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. Although the Company believes that adequate
reserves have been established for any additional liability, there can be no
assurance that the appeal will be resolved on a basis which is satisfactory to
the Company.
 
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based on
the advice of legal counsel, the ultimate resolution of these proceedings will
not have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
 
RESIDUAL MARKETS
 
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
 
YEAR 2000
 
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or
 
                                      F-37
<PAGE>
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
 
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Although the Company does not believe
that there is a material contingency associated with the Year 2000 project,
there can be no assurance that exposure for material contingencies will not
arise.
 
19.  STATUTORY FINANCIAL INFORMATION
 
The Company and its insurance subsidiaries are required to file annual
statements with state regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). Statutory surplus
differs from shareholder's equity reported in accordance with generally accepted
accounting principles for stock life insurance companies primarily because
policy acquisition costs are expensed when incurred, investment reserves are
based on different assumptions, postretirement benefit costs are based on
different assumptions and reflect a different method of adoption, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable. Statutory net income and surplus are as
follows:
 
<TABLE>
<CAPTION>
(IN MILLIONS)                                                                      1997       1996       1995
- -------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                              <C>        <C>        <C>
Statutory net income (Combined)
  Property and Casualty Companies..............................................  $   190.3  $   155.3  $   155.3
  Life and Health Companies....................................................      191.2      133.3      134.3
Statutory Shareholder's Surplus (Combined)
  Property and Casualty Companies..............................................  $ 1,279.8  $ 1,201.6  $ 1,128.4
  Life and Health Companies....................................................    1,221.3    1,120.1      965.6
</TABLE>
 
                                      F-38
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of First Allmerica Financial Life Insurance Company
and Policyowners of the Group VEL Account of First Allmercia Financial Life
insurance Company
 
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
(Growth, Investment Grade Income, Money Market, Equity Index, Government Bond,
Select Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select International Equity, Select Capital Appreciation, Fidelity
VIP High Income, Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity VIP
Overseas, Fidelity VIP II Asset Manager, T. Rowe Price International Stock, DGPF
International Equity INVESCO Industrial Income, and INVESCO Total Return)
constituting the Group VEL Account of First Allmerica Financial Life Insurance
Company at December 31, 1997, the results of each of their operations and the
changes in each of their net assets for each of the two years in the period then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of First Allmerica Financial Life
Insurance Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
 
/s/ Price Waterhouse LLP
 
PRICE WATERHOUSE LLP
 
Boston, Massachusetts
 
March 25, 1998
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF ASSETS AND LIABILITIES
                               DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                            INVESTMENT       MONEY                       GOVERNMENT
                                                GROWTH     GRADE INCOME     MARKET      EQUITY INDEX        BOND
                                              ----------   ------------   -----------   ------------   ---------------
<S>                                           <C>          <C>            <C>           <C>            <C>               <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................  $      360    $     251      $     230     $     392        $     240
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............          --           --             --            --               --
Investment in shares of T. Rowe Price
  International Series, Inc.................          --           --             --            --               --
Investment in shares of Delaware Group
  Premium Fund, Inc.........................          --           --             --            --               --
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................          --           --             --            --               --
                                              ----------   ------------   -----------   ------------   ---------------
  Total assets..............................         360          251            230           392              240
 
LIABILITIES:                                          --           --             --            --               --
                                              ----------   ------------   -----------   ------------   ---------------
  Net assets................................  $      360    $     251      $     230     $     392        $     240
                                              ----------   ------------   -----------   ------------   ---------------
                                              ----------   ------------   -----------   ------------   ---------------
 
Net asset distribution by category:
  Variable life policies....................  $       --    $      --      $      --     $      --        $      --
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................         360          251            230           392              240
                                              ----------   ------------   -----------   ------------   ---------------
                                              $      360    $     251      $     230     $     392        $     240
                                              ----------   ------------   -----------   ------------   ---------------
                                              ----------   ------------   -----------   ------------   ---------------
 
Units outstanding, December 31, 1997........         200          200            200           200              200
Net asset value per unit,
  December 31, 1997.........................  $ 1.798419    $1.256448      $1.149225     $1.961119        $1.197997
 
<CAPTION>
                                                   SELECT                              SELECT            SELECT         SELECT
 
                                                 AGGRESSIVE                            GROWTH            VALUE       INTERNATIONAL
 
                                                   GROWTH         SELECT GROWTH      AND INCOME       OPPORTUNITY*      EQUITY
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
<S>                                           <C>                 <C>             <C>                 <C>            <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................      $     351         $     386         $     359        $     355       $     289
 
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............             --                --                --               --              --
 
Investment in shares of T. Rowe Price
  International Series, Inc.................             --                --                --               --              --
 
Investment in shares of Delaware Group
  Premium Fund, Inc.........................             --                --                --               --              --
 
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................             --                --                --               --              --
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
  Total assets..............................            351               386               359              355             289
 
LIABILITIES:                                             --                --                --               --              --
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
  Net assets................................      $     351         $     386         $     359        $     355       $     289
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
Net asset distribution by category:
  Variable life policies....................      $      --         $      --         $      --        $      --       $      --
 
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................            351               386               359              355             289
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
                                                  $     351         $     386         $     359        $     355       $     289
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
                                              -----------------   -------------   -----------------   ------------   -------------
 
Units outstanding, December 31, 1997........            200               200               200              200             200
 
Net asset value per unit,
  December 31, 1997.........................      $1.753583         $1.929040         $1.793007        $1.774635       $1.442621
 
</TABLE>
 
* Name changed. See Note 1.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-1
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
                               DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                 SELECT       FIDELITY       FIDELITY       FIDELITY     FIDELITY      FIDELITY
                                                CAPITAL          VIP            VIP           VIP          VIP          VIP II
                                              APPRECIATION   HIGH INCOME   EQUITY-INCOME     GROWTH      OVERSEAS    ASSET MANAGER
                                              ------------   -----------   -------------   ----------   ----------   -------------
<S>                                           <C>            <C>           <C>             <C>          <C>          <C>
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................   $     346      $      --      $      --     $       --   $       --     $      --
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............          --            297            352            353          272           311
Investment in shares of T. Rowe Price
  International Series, Inc.................          --             --             --             --           --            --
Investment in shares of Delaware Group
  Premium Fund, Inc.........................          --             --             --             --           --            --
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................          --             --             --             --           --            --
                                              ------------   -----------   -------------   ----------   ----------   -------------
  Total assets..............................         346            297            352            353          272           311
 
LIABILITIES:                                          --             --             --             --           --            --
                                              ------------   -----------   -------------   ----------   ----------   -------------
  Net assets................................   $     346      $     297      $     352     $      353   $      272     $     311
                                              ------------   -----------   -------------   ----------   ----------   -------------
                                              ------------   -----------   -------------   ----------   ----------   -------------
 
Net asset distribution by category:
  Variable life policies....................   $      --      $      --      $      --     $       --   $       --     $      --
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................         346            297            352            353          272           311
                                              ------------   -----------   -------------   ----------   ----------   -------------
                                               $     346      $     297      $     352     $      353   $      272     $     311
                                              ------------   -----------   -------------   ----------   ----------   -------------
                                              ------------   -----------   -------------   ----------   ----------   -------------
 
Units outstanding, December 31, 1997........         200            200            200            200          200           200
Net asset value per unit,
  December 31, 1997.........................   $1.731812      $1.484711      $1.759719     $ 1.765047   $ 1.357742     $1.555159
 
<CAPTION>
 
                                                  T. ROWE PRICE                DGPF                 INVESCO              INVESCO
 
                                              INTERNATIONAL STOCK(A)   INTERNATIONAL EQUITY   INDUSTRIAL INCOME(A)   TOTAL RETURN(A)
 
                                              ----------------------   --------------------   --------------------   ---------------
 
<S>                                           <C>                      <C>                    <C>                    <C>
 
ASSETS (NOTES 3 AND 6):
Investments in shares of Allmerica
  Investment Trust..........................        $      --               $      --              $      --            $      --
 
Investments in shares of Fidelity Variable
  Insurance Products Funds (VIP)............               --                      --                     --                   --
 
Investment in shares of T. Rowe Price
  International Series, Inc.................               --                      --                     --                   --
 
Investment in shares of Delaware Group
  Premium Fund, Inc.........................               --                     278                     --                   --
 
Investments in shares of INVESCO Variable
  Investment Funds, Inc.....................               --                      --                     --                   --
 
                                                   ----------              ----------             ----------         ---------------
 
  Total assets..............................               --                     278                     --                   --
 
LIABILITIES:                                               --                      --                     --                   --
 
                                                   ----------              ----------             ----------         ---------------
 
  Net assets................................        $      --               $     278              $      --            $      --
 
                                                   ----------              ----------             ----------         ---------------
 
                                                   ----------              ----------             ----------         ---------------
 
Net asset distribution by category:
  Variable life policies....................        $      --               $      --              $      --            $      --
 
  Value of investment by First Allmerica
    Financial Life Insurance Company
    (Sponsor)...............................               --                     278                     --                   --
 
                                                   ----------              ----------             ----------         ---------------
 
                                                    $      --               $     278              $      --            $      --
 
                                                   ----------              ----------             ----------         ---------------
 
                                                   ----------              ----------             ----------         ---------------
 
Units outstanding, December 31, 1997........               --                     200                     --                   --
 
Net asset value per unit,
  December 31, 1997.........................        $1.000000               $1.392132              $1.000000            $1.000000
 
</TABLE>
 
(a) For the period ended 12/31/97, there were no transactions.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-2
<PAGE>
                               GROUP VEL ACCOUNT
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                         GROWTH
                                                   (UNAUDITED)     INVESTMENT GRADE INCOME
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $      6   $      5        $ 4   $     15   $14        $11
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Total expenses..........       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
  Net investment income.....        6          5          4         15    14         11
                                  ---        ---        ---        ---   ----       ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       58         26         18         --    --         --
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Net realized gain.......       58         26         18         --    --         --
  Net unrealized gain
    (loss)..................        9         17         17          6    (6)        11
                                  ---        ---        ---        ---   ----       ---
    Net realized and
      unrealized gain
      (loss)................       67         43         35          6    (6)        11
                                  ---        ---        ---        ---   ----       ---
    Net increase in net
      assets from
      operations............ $     73   $     48        $39   $     21   $ 8        $22
                                  ---        ---        ---        ---   ----       ---
                                  ---        ---        ---        ---   ----       ---
 
<CAPTION>
 
                                        MONEY MARKET                         EQUITY INDEX
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $     12   $   11        $  7       $        4   $   5         $ 1
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                                  ---   -------        ---              ---   ------        ---
    Total expenses..........       --       --          --               --      --          --
                                  ---   -------        ---              ---   ------        ---
  Net investment income.....       12       11           7                4       5           1
                                  ---   -------        ---              ---   ------        ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --       --          --               11       4          16
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                                  ---   -------        ---              ---   ------        ---
    Net realized gain.......       --       --          --               11       4          16
  Net unrealized gain
    (loss)..................       --       --          --               81      45          25
                                  ---   -------        ---              ---   ------        ---
    Net realized and
      unrealized gain
      (loss)................       --       --          --               92      49          41
                                  ---   -------        ---              ---   ------        ---
    Net increase in net
      assets from
      operations............ $     12   $   11        $  7       $       96   $  54         $42
                                  ---   -------        ---              ---   ------        ---
                                  ---   -------        ---              ---   ------        ---
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-3
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
                                     GOVERNMENT BOND
                                                   (UNAUDITED)    SELECT AGGRESSIVE GROWTH
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $     13   $     13        $ 9   $     --   $--        $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---        ---        ---   ---------  ----     -----
    Total expenses..........       --         --         --         --    --         --
                                  ---        ---        ---   ---------  ----     -----
  Net investment income.....       13         13          9         --    --         --
                                  ---        ---        ---   ---------  ----     -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --         --         --         29    21         --
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---        ---        ---   ---------  ----     -----
    Net realized gain.......       --         --         --         29    21         --
  Net unrealized gain
    (loss)..................        3         (5)         7         27    25         49
                                  ---        ---        ---   ---------  ----     -----
    Net realized and
      unrealized gain
      (loss)................        3         (5)         7         56    46         49
                                  ---        ---        ---   ---------  ----     -----
    Net increase in net
      assets from
      operations............ $     16   $      8        $16   $     56   $46        $49
                                  ---        ---        ---   ---------  ----     -----
                                  ---        ---        ---   ---------  ----     -----
 
<CAPTION>
 
                                       SELECT GROWTH                   SELECT GROWTH AND INCOME
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $      1   $    1        $ --       $        4   $   4         $ 2
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------        ---
    Total expenses..........       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------        ---
  Net investment income.....        1        1          --                4       4           2
                                  ---   -------      -----              ---   ------        ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       20       40          --               31      21          10
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------        ---
    Net realized gain.......       20       40          --               31      21          10
  Net unrealized gain
    (loss)..................       77       11          36               31      26          30
                                  ---   -------      -----              ---   ------        ---
    Net realized and
      unrealized gain
      (loss)................       97       51          36               62      47          40
                                  ---   -------      -----              ---   ------        ---
    Net increase in net
      assets from
      operations............ $     98   $   52        $ 36       $       66   $  51         $42
                                  ---   -------      -----              ---   ------        ---
                                  ---   -------      -----              ---   ------        ---
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-4
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
                                SELECT VALUE OPPORTUNITY*
                                                   (UNAUDITED)   SELECT INTERNATIONAL EQUITY
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $      2   $      2        $ 2   $      7   $ 5        $ 2
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Total expenses..........       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
  Net investment income.....        2          2          2          7     5          2
                                  ---        ---        ---        ---   ----       ---
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       47         12          5          9     1          1
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---        ---        ---        ---   ----       ---
    Net realized gain.......       47         12          5          9     1          1
  Net unrealized gain
    (loss)..................       22         49         14         (3)   44         23
                                  ---        ---        ---        ---   ----       ---
    Net realized and
      unrealized gain
      (loss)................       69         61         19          6    45         24
                                  ---        ---        ---        ---   ----       ---
    Net increase in net
      assets from
      operations............ $     71   $     63        $21   $     13   $50        $26
                                  ---        ---        ---        ---   ----       ---
                                  ---        ---        ---        ---   ----       ---
 
<CAPTION>
 
                                SELECT CAPITAL APPRECIATION            FIDELITY VIP HIGH INCOME
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $     --   $   --        $  5       $       18   $  17         $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                             ---------  -------        ---              ---   ------      -----
    Total expenses..........       --       --          --               --      --          --
                             ---------  -------        ---              ---   ------      -----
  Net investment income.....       --       --           5               18      17          --
                             ---------  -------        ---              ---   ------      -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --        1          --                2       3          --
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                             ---------  -------        ---              ---   ------      -----
    Net realized gain.......       --        1          --                2       3          --
  Net unrealized gain
    (loss)..................       43       23          74               25      11          21
                             ---------  -------        ---              ---   ------      -----
    Net realized and
      unrealized gain
      (loss)................       43       24          74               27      14          21
                             ---------  -------        ---              ---   ------      -----
    Net increase in net
      assets from
      operations............ $     43   $   24        $ 79       $       45   $  31         $21
                             ---------  -------        ---              ---   ------      -----
                             ---------  -------        ---              ---   ------      -----
</TABLE>
 
* Name changed. See Note 1.
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-5
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
                               FIDELITY VIP EQUITY-INCOME
                                                   (UNAUDITED)       FIDELITY VIP GROWTH
                                   FOR THE          FOR THE       FOR THE       (UNAUDITED)
                                  YEAR ENDED        PERIOD      YEAR ENDED        FOR THE
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,        PERIOD
                             --------------------     TO      ---------------     5/1/95**
                               1997       1996     12/31/95     1997     1996   TO 12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INVESTMENT INCOME:
  Dividends................. $      4   $     --        $ 4   $      1   $ 1        $--
 
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --         --    --         --
  Administrative expense
    fees....................       --         --         --         --    --         --
                                  ---   ---------       ---        ---   ----     -----
    Total expenses..........       --         --         --         --    --         --
                                  ---   ---------       ---        ---   ----     -----
  Net investment income.....        4         --          4          1     1         --
                                  ---   ---------       ---        ---   ----     -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       24         11         --          9    17         --
  Net realized gain from
    sales on investments....       --         --         --         --    --         --
                                  ---   ---------       ---        ---   ----     -----
    Net realized gain.......       24         11         --          9    17         --
  Net unrealized gain
    (loss)..................       49         23         37         57    19         49
                                  ---   ---------       ---        ---   ----     -----
    Net realized and
      unrealized gain
      (loss)................       73         34         37         66    36         49
                                  ---   ---------       ---        ---   ----     -----
    Net increase in net
      assets from
      operations............ $     77   $     34        $41   $     67   $37        $49
                                  ---   ---------       ---        ---   ----     -----
                                  ---   ---------       ---        ---   ----     -----
 
<CAPTION>
 
                                   FIDELITY VIP OVERSEAS            FIDELITY VIP II ASSET MANAGER
                                  FOR THE         (UNAUDITED)          FOR THE
                                 YEAR ENDED         FOR THE          YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,         PERIOD         DECEMBER 31,          FOR THE
                             ------------------     5/1/95**     -------------------  PERIOD 5/1/95**
                               1997      1996     TO 12/31/95       1997       1996     TO 12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INVESTMENT INCOME:
  Dividends................. $      5   $    2        $ --       $        8   $   8         $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --       --          --               --      --          --
  Administrative expense
    fees....................       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------      -----
    Total expenses..........       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------      -----
  Net investment income.....        5        2          --                8       8          --
                                  ---   -------      -----              ---   ------      -----
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       17        3          --               23       7          --
  Net realized gain from
    sales on investments....       --       --          --               --      --          --
                                  ---   -------      -----              ---   ------      -----
    Net realized gain.......       17        3          --               23       7          --
  Net unrealized gain
    (loss)..................        7       23          15               22      18          25
                                  ---   -------      -----              ---   ------      -----
    Net realized and
      unrealized gain
      (loss)................       24       26          15               45      25          25
                                  ---   -------      -----              ---   ------      -----
    Net increase in net
      assets from
      operations............ $     29   $   28        $ 15       $       53   $  33         $25
                                  ---   -------      -----              ---   ------      -----
                                  ---   -------      -----              ---   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-6
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF OPERATIONS (CONTINUED)
 
<TABLE>
<CAPTION>
                                DGPF INTERNATIONAL EQUITY
                                                   (UNAUDITED)
                                   FOR THE          FOR THE
                                  YEAR ENDED        PERIOD
                                 DECEMBER 31,      5/1/95**
                             --------------------     TO
                               1997       1996     12/31/95
                             ---------  ---------  ---------
<S>                          <C>        <C>        <C>
INVESTMENT INCOME:
  Dividends................. $      9   $      7        $--
EXPENSES (NOTE 4):
  Mortality and expense risk
    fees....................       --         --         --
  Administrative expense
    fees....................       --         --         --
                                  ---        ---   ---------
    Total expenses..........       --         --         --
                                  ---        ---   ---------
  Net investment income.....        9          7         --
                                  ---        ---   ---------
REALIZED AND UNREALIZED GAIN
  (LOSS)
  ON INVESTMENTS:
  Realized gain
    distributions from
    portfolio sponsors......       --          2         --
  Net realized gain from
    sales on investments....       --         --         --
                                  ---        ---   ---------
    Net realized gain.......       --          2         --
  Net unrealized gain
    (loss)..................        8         35         17
                                  ---        ---   ---------
    Net realized and
     unrealized gain
     (loss).................        8         37         17
                                  ---        ---   ---------
    Net increase in net
     assets from
     operations............. $     17   $     44        $17
                                  ---        ---   ---------
                                  ---        ---   ---------
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-7
<PAGE>
                               GROUP VEL ACCOUNT
                      STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
                                         GROWTH
                                                   (UNAUDITED)
                                                    PERIOD        INVESTMENT GRADE INCOME
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      6   $      5        $ 4   $     15   $14        $11
    Net realized gain.......       58         26         18         --    --         --
    Net unrealized gain
      (loss)................        9         17         17          6    (6)        11
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       73         48         39         21     8         22
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       73         48        239         21     8        222
NET ASSETS:
    Beginning of period.....      287        239         --        230   222         --
                             ---------  ---------  ---------  ---------  ----     -----
    End of period........... $    360   $    287        $239  $    251   $230       $222
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                        MONEY MARKET                         EQUITY INDEX
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $     12   $   11        $  7       $        4   $   5         $ 1
    Net realized gain.......       --       --          --               11       4          16
    Net unrealized gain
      (loss)................       --       --          --               81      45          25
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       12       11           7               96      54          42
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       12       11         207               96      54         242
NET ASSETS:
    Beginning of period.....      218      207          --              296     242          --
                             ---------  -------      -----            -----   ------      -----
    End of period........... $    230   $  218        $207       $      392   $ 296         $242
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-8
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
                                     GOVERNMENT BOND
                                                   (UNAUDITED)
                                                    PERIOD       SELECT AGGRESSIVE GROWTH
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $     13   $     13        $ 9   $     --   $--        $--
    Net realized gain.......       --         --         --         29    21         --
    Net unrealized gain
      (loss)................        3         (5)         7         27    25         49
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       16          8         16         56    46         49
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       16          8        216         56    46        249
NET ASSETS:
    Beginning of period.....      224        216         --        295   249         --
                             ---------  ---------  ---------  ---------  ----     -----
    End of period........... $    240   $    224        $216  $    351   $295       $249
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                       SELECT GROWTH                   SELECT GROWTH AND INCOME
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      1   $    1        $ --       $        4   $   4         $ 2
    Net realized gain.......       20       40          --               31      21          10
    Net unrealized gain
      (loss)................       77       11          36               31      26          30
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       98       52          36               66      51          42
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       98       52         236               66      51         242
NET ASSETS:
    Beginning of period.....      288      236          --              293     242          --
                             ---------  -------      -----            -----   ------      -----
    End of period........... $    386   $  288        $236       $      359   $ 293         $242
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                      SA-9
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
                                SELECT VALUE OPPORTUNITY*
                                                   (UNAUDITED)
                                                    PERIOD      SELECT INTERNATIONAL EQUITY
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      2   $      2        $ 2   $      7   $ 5        $ 2
    Net realized gain.......       47         12          5          9     1          1
    Net unrealized gain
      (loss)................       22         49         14         (3)   44         23
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       71         63         21         13    50         26
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       71         63        221         13    50        226
NET ASSETS:
  Beginning of period.......      284        221         --        276   226         --
                             ---------  ---------  ---------  ---------  ----     -----
  End of period............. $    355   $    284        $221  $    289   $276       $226
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                SELECT CAPITAL APPRECIATION            FIDELITY VIP HIGH INCOME
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $     --   $   --        $  5       $       18   $  17         $--
    Net realized gain.......       --        1          --                2       3          --
    Net unrealized gain
      (loss)................       43       23          74               25      11          21
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       43       24          79               45      31          21
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       43       24         279               45      31         221
NET ASSETS:
  Beginning of period.......      303      279          --              252     221          --
                             ---------  -------      -----            -----   ------      -----
  End of period............. $    346   $  303        $279       $      297   $ 252         $221
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
* Name changed. See Note 1.
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                     SA-10
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
                               FIDELITY VIP EQUITY-INCOME
                                                   (UNAUDITED)
                                                    PERIOD          FIDELITY VIP GROWTH
                                  YEAR ENDED         FROM       YEAR ENDED      (UNAUDITED)
                                 DECEMBER 31,      5/1/95**    DECEMBER 31,     PERIOD FROM
                             --------------------     TO      ---------------   5/1/95** TO
                               1997       1996     12/31/95     1997     1996     12/31/95
                             ---------  ---------  ---------  ---------  ----  --------------
<S>                          <C>        <C>        <C>        <C>        <C>   <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      4   $     --        $ 4   $      1   $ 1        $--
    Net realized gain.......       24         11         --          9    17         --
    Net unrealized gain
      (loss)................       49         23         37         57    19         49
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from
      operations............       77         34         41         67    37         49
                             ---------  ---------  ---------  ---------  ----     -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --         --    --         --
    Terminations............       --         --         --         --    --         --
    Insurance and other
      charges...............       --         --         --         --    --         --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --         --         --    --         --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets from capital
      transactions..........       --         --        200         --    --        200
                             ---------  ---------  ---------  ---------  ----     -----
    Net increase in net
      assets................       77         34        241         67    37        249
NET ASSETS:
  Beginning of period.......      275        241         --        286   249         --
                             ---------  ---------  ---------  ---------  ----     -----
  End of period............. $    352   $    275        $241  $    353   $286       $249
                             ---------  ---------  ---------  ---------  ----     -----
                             ---------  ---------  ---------  ---------  ----     -----
 
<CAPTION>
 
                                   FIDELITY VIP OVERSEAS            FIDELITY VIP II ASSET MANAGER
                                 YEAR ENDED       (UNAUDITED)        YEAR ENDED         (UNAUDITED)
                                DECEMBER 31,      PERIOD FROM       DECEMBER 31,        PERIOD FROM
                             ------------------   5/1/95** TO    -------------------    5/1/95** TO
                               1997      1996       12/31/95        1997       1996      12/31/95
                             ---------  -------  --------------  -----------  ------  ---------------
<S>                          <C>        <C>      <C>             <C>          <C>     <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      5   $    2        $ --       $        8   $   8         $--
    Net realized gain.......       17        3          --               23       7          --
    Net unrealized gain
      (loss)................        7       23          15               22      18          25
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from
      operations............       29       28          15               53      33          25
                             ---------  -------      -----            -----   ------      -----
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --       --          --               --      --          --
    Terminations............       --       --          --               --      --          --
    Insurance and other
      charges...............       --       --          --               --      --          --
    Other transfers from
      (to) the General
      Account of First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --          --               --      --          --
    Net increase in
      investment by First
      Allmerica Financial
      Life Insurance Company
      (Sponsor).............       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets from capital
      transactions..........       --       --         200               --      --         200
                             ---------  -------      -----            -----   ------      -----
    Net increase in net
      assets................       29       28         215               53      33         225
NET ASSETS:
  Beginning of period.......      243      215          --              258     225          --
                             ---------  -------      -----            -----   ------      -----
  End of period............. $    272   $  243        $215       $      311   $ 258         $225
                             ---------  -------      -----            -----   ------      -----
                             ---------  -------      -----            -----   ------      -----
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                     SA-11
<PAGE>
                               GROUP VEL ACCOUNT
                STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
 
<TABLE>
<CAPTION>
                                DGPF INTERNATIONAL EQUITY
                                                   (UNAUDITED)
                                                    PERIOD
                                  YEAR ENDED         FROM
                                 DECEMBER 31,      5/1/95**
                             --------------------     TO
                               1997       1996     12/31/95
                             ---------  ---------  ---------
<S>                          <C>        <C>        <C>
INCREASE IN NET ASSETS:
  FROM OPERATIONS:
    Net investment income... $      9   $      7        $--
    Net realized gain.......       --          2         --
    Net unrealized gain
     (loss).................        8         35         17
                             ---------  ---------  ---------
    Net increase in net
     assets from
     operations.............       17         44         17
                             ---------  ---------  ---------
  FROM CAPITAL TRANSACTIONS:
    Net premiums............       --         --         --
    Terminations............       --         --         --
    Insurance and other
     charges................       --         --         --
    Other transfers from
     (to) the General
     Account of First
      Allmerica Financial
     Life Insurance Company
     (Sponsor)..............       --         --         --
    Net increase in
     investment by First
     Allmerica Financial
      Life Insurance Company
     (Sponsor)..............       --         --        200
                             ---------  ---------  ---------
    Net increase in net
     assets from capital
     transactions...........       --         --        200
                             ---------  ---------  ---------
    Net increase in net
     assets.................       17         44        217
NET ASSETS:
    Beginning of period.....      261        217         --
                             ---------  ---------  ---------
    End of period........... $    278   $    261        $217
                             ---------  ---------  ---------
                             ---------  ---------  ---------
</TABLE>
 
** Date of initial investment.
 
   The accompanying notes are an integral part of these financial statements.
 
                                     SA-12
<PAGE>
                               GROUP VEL ACCOUNT
 
                         NOTES TO FINANCIAL STATEMENTS
 
NOTE 1 -- ORGANIZATION
 
The Group VEL Account (Group VEL) is a separate investment account of First
Allmerica Financial Life Insurance Company (the Company) established on November
13, 1996 (initial investment by the Company occurred on May 1, 1995), for the
purpose of separating from the general assets of the Company those assets used
to fund the variable portion of certain flexible premium variable life policies
issued by the Company. The Company is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Group VEL are clearly identified and distinguished from the other
assets and liabilities of the Company. Group VEL cannot be charged with
liabilities arising out of any other business of the Company.
 
Group VEL is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). Group VEL currently offers twenty
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio of the Allmerica Investment Trust (the Trust) managed by Allmerica
Investment Management Company, Inc., a wholly-owned subsidiary of First
Allmerica, or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II) managed by Fidelity
Management & Research Company (FMR), or of the T. Rowe Price International
Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming International, Inc.,
or of the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware
International Advisers, Ltd., or of INVESCO Variable Investment Funds, Inc.
(INVESCO) managed by INVESCO Funds Group, Inc. The Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF and INVESCO (the Funds) are open-end, diversified
management investment companies registered under the 1940 Act. INVESCO is
available only to employees of INVESCO and its affiliates.
 
Effective April 1, 1997, the investment portfolio of the Trust, which was
formerly known as Small Cap Value Fund, changed its name to Small-Mid Cap Value
Fund. At the Meeting of Shareholders of the Small Cap Value Fund, held on March
18, 1997, shareholders approved the name change and the revisions in the
investment objective of the Fund from investing primarily in small cap value
stocks to investing primarily in small and mid-cap value stocks. Effective
January 9, 1998, the portfolio changed its name to Select Value Opportunity
Fund.
 
Certain prior year balances have been reclassified to conform with current year
presentation.
 
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
 
INVESTMENTS -- Security transactions are recorded on the trade date. Investments
held by the Sub-Accounts are stated at the net asset value per share of the
respective investment portfolio of the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, DGPF, or INVESCO. Net realized gains and losses on securities sold
are determined using the average cost method. Dividends and capital gain
distributions are recorded on the ex-dividend date and are reinvested in
additional shares of the respective investment portfolio of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, or INVESCO at net asset value.
 
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company" under
Subchapter L of the Internal Revenue Code (the Code) and files a consolidated
federal income tax return. The Company anticipates no tax liability resulting
from the operations of Group VEL. Therefore, no provision for income taxes has
been charged against Group VEL.
 
                                     SA-13
<PAGE>
                               GROUP VEL ACCOUNT
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3 -- INVESTMENTS
 
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price, DGPF and INVESCO at December 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                       PORTFOLIO INFORMATION
                                                   -----------------------------
                                                                       NET ASSET
                                                   NUMBER OF AGGREGATE   VALUE
INVESTMENT PORTFOLIO                                SHARES     COST    PER SHARE
- -------------------------------------------------- --------- --------- ---------
<S>                                                <C>       <C>       <C>
ALLMERICA INVESTMENT TRUST:
  Growth..........................................    149       $316    $ 2.416
  Investment Grade Income.........................    226        240      1.112
  Money Market....................................    230        230      1.000
  Equity Index....................................    142        241      2.753
  Government Bond.................................    229        236      1.047
  Select Aggressive Growth........................    158        249      2.225
  Select Growth...................................    213        263      1.811
  Select Growth and Income........................    231        272      1.552
  Select Value Opportunity*.......................    218        271      1.626
  Select International Equity.....................    215        225      1.341
  Select Capital Appreciation.....................    204        206      1.697
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
  High Income.....................................     22        240     13.580
  Equity-Income...................................     14        243     24.280
  Growth..........................................     10        228     37.100
  Overseas........................................     14        226     19.200
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
  Asset Manager...................................     17        246     18.010
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
  International Stock.............................     --         --         --
DELAWARE GROUP PREMIUM FUND, INC.:
  International Equity............................     18        218     15.520
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
  Industrial Income...............................     --         --         --
  Total Return....................................     --         --         --
</TABLE>
 
* Name changed. See Note 1.
 
NOTE 4 -- RELATED PARTY TRANSACTIONS
 
On the date of issue and each monthly payment date thereafter, a monthly charge
is deducted from the policy value to compensate the Company for the cost of
insurance, which varies by policy, the cost of any additional benefits provided
by rider, and a monthly administrative charge of up to $10. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value. For the years
ended
 
                                     SA-14
<PAGE>
                               GROUP VEL ACCOUNT
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
 
December 31, 1997, 1996 and 1995, there were no monthly deductions from
sub-account policy values since no policies were issued.
 
The Company makes a charge of up to .90% per annum based on the average daily
net assets of each Sub-Account at each valuation date for mortality and expense
risks. For the years ended December 31, 1997, 1996 and 1995, there were no
mortality and expense risk charges since no policies were issued. The mortality
and expense risks annual charge may be increased or decreased by the Board of
Directors of the Company once each year, subject to compliance with applicable
state and federal requirements, but the total charge may not exceed .90% per
annum. For up to the first 10 policy years, the Company also charges up to .25%
per annum based on the average daily net assets of each Sub-Account for
administrative expenses.
 
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned subsidiary
of the Company, is principal underwriter and general distributor of Group VEL,
and does not receive any compensation for sales of Group VEL policies.
Commissions are paid to registered representatives of Allmerica Investments or
of independent broker-dealers by the Company. As the current series of policies
have a surrender charge, no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1997, 1996 and 1995, there were no
surrender charges applicable to Group VEL.
 
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
 
Under the provisions of Section 817(h) of the Code, a variable life insurance
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
 
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. The Company believes that Group VEL satisfies the current requirements of
the regulations, and it intends that Group VEL will continue to meet such
requirements.
 
                                     SA-15
<PAGE>
                               GROUP VEL ACCOUNT
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
 
Cost of purchases and proceeds from sales of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price, DGPF and INVESCO shares by Group VEL during the year
ended December 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO                                         PURCHASES SALES
- ------------------------------------------------------------ --------- -----
<S>                                                          <C>       <C>
ALLMERICA INVESTMENT TRUST:
  Growth....................................................    $ 64   $ --
  Investment Grade Income...................................      15     --
  Money Market..............................................      12     --
  Equity Index..............................................      15     --
  Government Bond...........................................      13     --
  Select Aggressive Growth..................................      29     --
  Select Growth.............................................      21     --
  Select Growth and Income..................................      35     --
  Select Value Opportunity*.................................      49     --
  Select International Equity...............................      16     --
  Select Capital Appreciation...............................      --     --
FIDELITY VARIABLE INSURANCE PRODUCTS FUND:
  High Income...............................................      20     --
  Equity-Income.............................................      28     --
  Growth....................................................      10     --
  Overseas..................................................      22     --
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II:
  Asset Manager.............................................      31     --
T. ROWE PRICE INTERNATIONAL SERIES, INC.:
  International Stock.......................................      --     --
DELAWARE GROUP PREMIUM FUND, INC.:
  International Equity......................................       9     --
INVESCO VARIABLE INVESTMENT FUNDS, INC.:
  Industrial Income.........................................      --     --
  Total Return..............................................      --     --
                                                             --------- -----
Total.......................................................    $389   $ --
                                                             --------- -----
                                                             --------- -----
</TABLE>
 
* Name changed. See Note 1.
 
                                     SA-16
<PAGE>


   
                                      SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts on the 1st day of October, 1998.
     
                                  GROUP VEL ACCOUNT
                 of  First Allmerica Financial Life Insurance Company

                          By: /s/ Abigail M. Armstrong
                             ---------------------------------
                               Abigail M. Armstrong, Secretary

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.


 Signatures                   Title                             Date
- -----------                   -----                             -----

 /s/ John F. O'Brien          Director, President and Chief     October 1, 1998
- ---------------------------   Executive Officer
 John F. O'Brien           

 /s/ Bruce C. Anderson        Director and Vice President
- ---------------------------
 Bruce C. Anderson

 /s/ Warren E. Barnes         Vice President and Corporate
- ---------------------------   Controller
 Warren E. Barnes          

 /s/ Robert E. Bruce          Director, Vice President and
- ---------------------------   Chief Information Officer
 Robert E. Bruce           

 /s/ John P. Kavanaugh        Director, Vice President and
- ---------------------------   Chief Investment Officer
 John P. Kavanaugh         

 /s/ John F. Kelly            Director, Senior Vice President
- ---------------------------   and General Counsel
 John F. Kelly             

 /s/ J. Barry May             Director
- ---------------------------
 J. Barry May

 /s/ James R. McAuliffe       Director
- ---------------------------
 James R. McAuliffe

 /s/ Edward J. Parry III      Director, Vice President, Chief
- ---------------------------   Financial Officer and Treasurer
 Edward J. Parry III       

 /s/ Richard M. Reilly        Director and Vice President
- ---------------------------
 Richard M. Reilly


 /s/ Robert P. Restrepo, Jr.  Director and Vice President
- ---------------------------
 Robert P. Restrepo, Jr.

 /s/ Eric A. Simonsen         Director and Vice President
- ---------------------------
 Eric A. Simonsen

 /s/ Phillip E. Soule         Director and Vice President
- ---------------------------
 Phillip E. Soule
    

<PAGE>

PART II


UNDERTAKING TO FILE REPORTS

Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission ("SEC") such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.


RULE 484 UNDERTAKING

To the fullest extent permissible under Massachusetts General Laws, no director
should be personally liable to the Company or any policyholder for monetary
damages for any breach of fiduciary duty as a director, notwithstanding any
provisions of law to the contrary;  provided, however, that this provision shall
not eliminate or limit the liability of a director;

1.   for any breach of the director's duty of loyalty to the Company or its
     policyholders;

2.   for acts or omissions not in good faith, or which involve intentional
     misconduct or a knowing violation of law;

3.   for liability, if any, imposed on directors of mutual insurance companies
     pursuant to M.G.L.A. c. 156B Section 61 or M.G.L.A. c. 156B Section 63;

4.   for any transaction from which the director derived an improper personal
     benefit.

Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.  In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.


REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940

The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.


<PAGE>


                        CONTENTS OF THE REGISTRATION STATEMENT

   
This registration statement comprises the following papers and documents:

The facing sheet
Cross-reference to items required by Form N-8B-2
Prospectus A consists of           pages
Prospectus B consists of           pages
The undertaking to file reports
The undertaking pursuant to Rule 484 under the 1933 Act
Representations pursuant to Section 26(e) of the 1940 Act
The signatures

    

Written consents of the following persons:

1.   Actuarial Consent
1.   Opinion of Counsel
2.   Consent of Independent Accountants

The following exhibits:


   
     1.   Exhibits (Exhibits required by paragraph A of the instructions to Form
          N-8B-2)

     (1)  Certified copy of Resolutions of the Board of Directors of the Company
          of November 22, 1993 authorizing the Group VEL Account was previously
          filed in Registrants Initial Registration Statement in June, 1996 and
          incorporated by reference herein.

     (2)  Not Applicable.

     (3)  (a)  Underwriting and Administrative Services Agreement between the
               Company and Allmerica Investments, Inc., was previously filed on
               April 16, 1998 in Post-Effective Amendment No. 4, and is
               incorporated by reference herein. 
     
          (b)  Registered Representatives/Agents Agreement were previously filed
               on April 16, 1998 in Post-Effective Amendment No. 4, and is
               incorporated by reference herein.
     
          (c)  Sales Agreements with broker-dealers were previously filed on 
               April 16, 1998 in Post-Effective Amendment No. 4, and is
               incorporated by reference herein.
     
          (d)  Sales Agreement with Chase was previously filed on April 16, 1998
               in Post-Effective Amendment No. 4, and is incorporated by
               reference herein.

          (e)  Commission Schedule was previously filed on April 16, 1998 in 
               Post-Effective Amendment No. 4, and is incorporated by reference
               herein.

          (f)  General Agents Agreement was previously filed on April 16, 1998 
               in Post-Effective Amendment No. 4, and is incorporated by
               reference herein.

          (g)  Career Agents Agreement was previously filed on April 16, 1998 in
               Post-Effective Amendment No. 4, and is incorporated by reference
               herein.
     
     (4)  Not Applicable.
    


<PAGE>



   
     (5)  Policy and Policy riders were previously filed on April 16, 1998 in
          Post-Effective Amendment No. 4, and is incorporated by reference
          herein.
    

     (6)  Company's Restated Articles of Incorporation and Bylaws were
          previously filed in Registrant's initial Registration Statement, and
          are incorporated by reference herein. 

     (7)  Not Applicable.

   
     (8)  (a)  Participation Agreement with Allmerica Investment Trust was 
               previously filed on April 16, 1998 in Post-Effective Amendment
               No. 4, and is incorporated by reference herein.
    

   
          (b)  Participation Agreement with Variable Insurance Products Fund was
               previously filed in Registrant's initial Registration Statement
               in June, 1996 and is incorporated by reference herein.  Amendment
               to Participation Agreement with Variable Insurance Products Fund
               was previously filed on April 16, 1998 in Post-Effective
               Amendment No. 4, and is incorporated by reference herein.
    

   
          (c)  Participation Agreement with Variable Insurance Products Fund II
               was previously filed in initial Registration Statement in
               June, 1996 and is incorporated by reference herein.  Amendment to
               Participation Agreement with Variable Insurance Products Fund II
               was previously filed on April 16, 1998 in Post-Effective
               Amendment No. 4, and is incorporated by reference herein.
    

   
          (d)  Form of Participation Agreement with Variable Insurance Products
               Fund III is filed herewith.
    

          (e)  Form of Participation Agreement with Delaware Group Premium Fund,
               Inc. was previously filed in initial Registration Statement in
               June, 1996 and is incorporated by reference herein.
     
          (f)  Participation Agreement with T. Rowe Price International Series,
               Inc. was previously filed in initial Registration Statement
               in June, 1996 and is incorporated by reference herein.
     
          (g)  Fidelity Services Agreement, effective as of November 1, 1995,
               was previously filed on April 30, 1996 in Pre-Effective Amendment
               No. 1, and is incorporated by reference herein.  
     
          (h)  An Amendment to the Fidelity Service Agreement, effective as of
               January 1, 1997, was previously filed on April 30, 1997 in
               Post-Effective Amendment No. 1 and is incorporated by reference
               herein.
     
          (i)  Fidelity Service Contract, effective as of January 1, 1997, was
               previously filed on April 30, 1997 in Post-Effective Amendment
               No. 1 and is incorporated by reference herein.

   
          (j)  Service Agreement with Rowe Price-Fleming International, Inc. was
               previously filed on April 16, 1998 in Post-Effective Amendment
               No. 4, and is incorporated by reference herein.

    

   
          (k)  Participation Agreement with INVESCO was previously filed on
               April 16, 1998 in Post-Effective Amendment No. 4, and is
               incorporated by reference herein.
    


<PAGE>


     (9)  Not Applicable.

   
     (10) Application was previously filed on April 16, 1998 in Post-Effective
          Amendment No. 4, and is incorporated by reference herein.
    

   
2.   Policy and Policy riders were previously filed on April 16, 1998 in Post-
     Effective Amendment No. 4, and is incorporated by reference herein.
    

3.   Opinion of Counsel is filed herewith.

4.   Not Applicable.

5.   Not Applicable.

6.   Actuarial Consent is filed herewith.

7.   Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(iii) under the 1940
     Act, which includes conversion procedures pursuant to Rule
     6e-3(T)(b)(13)(v)(B), was previously filed in Pre-Effective Amendment No. 1
     on June 7, 1996 and is incorporated by reference herein.

8.   Consent of Independent Accountants is filed herewith.

9.   None


<PAGE>


                                    EXHIBIT TABLE

Exhibit 1(8)(d)  Form of Participation Agreement
Exhibit 3        Consent and Opinion of Counsel
Exhibit 6        Actuarial Consent
Exhibit 8        Consent of Independent Accountants

<PAGE>

                                       FORM OF

                              PARTICIPATION AGREEMENT
                                          
                                          
                                       Among
                                          
                                          
                       VARIABLE INSURANCE PRODUCTS FUND III,
                                          
                         FIDELITY DISTRIBUTORS CORPORATION
                                          
                                        and
                                          
                                 INSURANCE COMPANY
                                          
                                          
          THIS AGREEMENT, made and entered into as of the _________ day of
______________, 1998 by and among ________________ LIFE INSURANCE COMPANY,
(hereinafter the "Company"), a ___________ corporation, on its own behalf and on
behalf of each segregated asset account of the Company set forth on Schedule A
hereto as may be amended from time to time (each such account hereinafter
referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND III, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.

          WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and

          WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series hereinafter referred to as a
"Portfolio"); and

          WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit

<PAGE>

shares of the Fund to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated life insurance
companies (hereinafter the "Shared Funding Exemptive Order"); and

          WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and

          WHEREAS, Fidelity Management & Research Company (the "Adviser") is
duly registered as an investment adviser under the federal Investment Advisers
Act of 1940 and any applicable state securities law; and

          WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and

          WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and

          WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and

          WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and

          WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;

          NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:


                          ARTICLE I.  SALE OF FUND SHARES

          1.1.  The Underwriter agrees to sell to the Company those shares of
the Fund which each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
the order for the shares of the Fund.  For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall


                                          2
<PAGE>

constitute receipt by the Fund; provided that the Fund receives notice of such
order by 9:00 a.m. Boston time on the next following Business Day.  "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.

          1.2.  The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading.  Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.

          1.3.  The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts. 
No shares of any Portfolio will be sold to the general public.

          1.4.  The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.

          1.5.  The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption.  For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.

          1.6.  The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus.  The Company agrees that all
net amounts available under the variable annuity contracts with the form
number(s) which are listed on Schedule A attached hereto and incorporated herein
by this reference, as such Schedule A may be amended from time to time hereafter
by mutual written agreement of all the parties hereto, (the "Contracts") shall
be invested in the Fund, in such other Funds advised by the Adviser as may be
mutually agreed to in writing by the parties hereto, or in the Company's general
account, provided that such amounts may also be invested in an investment
company other than the Fund if (a) such other investment company, or series
thereof, has


                                          3
<PAGE>

investment objectives or policies that are substantially different from the
investment objectives and policies of all the Portfolios of the Fund; or (b) the
Company gives the Fund and the Underwriter 45 days written notice of its
intention to make such other investment company available as a funding vehicle
for the Contracts; or (c) such other investment company was available as a
funding vehicle for the Contracts prior to the date of this Agreement and the
Company so informs the Fund and Underwriter prior to their signing this
Agreement (a list of such funds appearing on Schedule C to this Agreement); or
(d) the Fund or Underwriter consents to the use of such other investment
company.

          1.7.  The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof.  Payment shall be in federal funds transmitted by wire. 
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.

          1.8.  Issuance and transfer of the Fund's shares will be by book entry
only.  Stock certificates will not be issued to the Company or any Account. 
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.

          1.9.  The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares.  The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio.  The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash.  The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.

          1.10.  The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.


                    ARTICLE II.  REPRESENTATIONS AND WARRANTIES

          2.1.  The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements.  The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset


                                          4
<PAGE>

account under Section _________ of the ______________ Insurance Code and has
registered or, prior to any issuance or sale of the Contracts, will register
each Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.

          2.2.  The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of ______________ and
all applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act.  The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares.  The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.

          2.3.  The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.

          2.4.  The Company represents that the Contracts are currently treated
as endowment or annuity insurance contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.

          2.5.  (a)  With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses pursuant
to Rule 12b-1 under the 1940 Act or otherwise, although it may make such
payments in the future.  The Fund has adopted a "no fee" or "defensive" Rule
12b-1 Plan under which it makes no payments for distribution expenses.  To the
extent that it decides to finance distribution expenses pursuant to Rule 12b-1,
the Fund undertakes to have a board of trustees, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.

               (b)  With respect to Service Class shares, the Fund has adopted a
Rule 12b-1 Plan under which it makes payments to finance distribution expenses. 
The Fund represents and warrants that it has a board of trustees, a majority of
whom are not interested persons of the Fund, which has formulated and approved
the Fund's Rule 12b-1 Plan to finance distribution expenses of the Fund and that
any changes to the Fund's Rule 12b-1 Plan will be approved by a similarly
constituted board of trustees.


                                          5
<PAGE>

          2.6.  The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of ______________ and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of ______________ to the extent required to perform
this Agreement.

          2.7.  The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC. 
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the State of ______________ and all
applicable state and federal securities laws, including without limitation the
1933 Act, the 1934 Act, and the 1940 Act.

          2.8.  The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.

          2.9.  The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of ______________ and any applicable state and federal securities
laws.

          2.10.  The Fund and Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time.  The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.

          2.11.  The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage for the benefit of the Fund, and that said bond is
issued by a reputable bonding company, includes coverage for larceny and
embezzlement, and is in an amount not less than $5 million.  The Company agrees
to make all reasonable efforts to see that this bond or another bond containing
these provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.


          ARTICLE III.  PROSPECTUSES AND PROXY STATEMENTS; VOTING


                                          6
<PAGE>

          3.1.  The Underwriter shall provide the Company with as many printed
copies of the Fund's current prospectus and Statement of Additional Information
as the Company may reasonably request.  If requested by the Company in lieu
thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance as
is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of Additional
Information for the Contracts printed together in one document.  Alternatively,
the Company may print the Fund's prospectus and/or its Statement of Additional
Information in combination with other fund companies' prospectuses and
statements of additional information.  Except as provided in the following three
sentences, all expenses of printing and distributing Fund prospectuses and
Statements of Additional Information shall be the expense of the Company.  For
prospectuses and Statements of Additional Information provided by the Company to
its existing owners of Contracts in order to update disclosure annually as
required by the 1933 Act and/or the 1940 Act, the cost of printing shall be
borne by the Fund.  If the Company chooses to receive camera-ready film in lieu
of receiving printed copies of the Fund's prospectus, the Fund will reimburse
the Company in an amount equal to the product of A and B where A is the number
of such prospectuses distributed to owners of the Contracts, and B is the Fund's
per unit cost of typesetting and printing the Fund's prospectus.  The same
procedures shall be followed with respect to the Fund's Statement of Additional
Information.

          The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of printing any prospectuses or Statements of
Additional Information other than those actually distributed to existing owners
of the Contracts.

          3.2.  The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter or the
Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund).

          3.3.  The Fund, at its expense, shall provide the Company with copies
of its proxy statements, reports to shareholders, and other communications
(except for prospectuses and Statements of Additional Information, which are
covered in Section 3.1) to shareholders in such quantity as the Company shall
reasonably require for distributing to Contract owners.

          3.4.  If and to the extent required by law the Company shall:

          (i)    solicit voting instructions from Contract owners;
          (ii)   vote the Fund shares in accordance with instructions received
                 from Contract owners; and

                                          7
<PAGE>

          (iii)  vote Fund shares for which no instructions have been received
                 in a particular separate account in the same proportion as
                 Fund shares of such portfolio for which instructions have been
                 received in that separate account,

so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners.  The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law.  Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.

          3.5.  The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b).  Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.


                    ARTICLE IV.  SALES MATERIAL AND INFORMATION

          4.1.  The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use.  No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.

          4.2.  The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.

          4.3.  The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other


                                          8
<PAGE>

promotional material in which the Company and/or its separate account(s), is
named at least fifteen Business Days prior to its use.  No such material shall
be used if the Company or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.

          4.4.  The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.

          4.5.  The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.

          4.6.  The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.

          4.7.  For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund:  advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.


                           ARTICLE V.  FEES AND EXPENSES


                                          9
<PAGE>

          5.1.  The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the Underwriter.  No such payments shall be made directly by the Fund.

          5.2.  All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund.  The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale.  The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.

          5.3.  The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.


                            ARTICLE VI.  DIVERSIFICATION

          6.1.  The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder.  Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations.  In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.


                         ARTICLE VII.  POTENTIAL CONFLICTS

          7.1.  The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners of
all separate accounts investing in the Fund.  An irreconcilable material
conflict may arise for a variety of reasons, including:  (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar action
by


                                          10
<PAGE>

insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners.  The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.

          7.2.  The Company will report any potential or existing conflicts of
which it is aware to the Board.  The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised.  This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.

          7.3.  If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including:  (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.

          7.4.  If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board.  Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.

          7.5.  If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment


                                          11
<PAGE>

in the Fund and terminate this Agreement with respect to such Account within six
months after the Board informs the Company in writing that it has determined
that such decision has created an irreconcilable material conflict; provided,
however, that such withdrawal and termination shall be limited to the extent
required by the foregoing material irreconcilable conflict as determined by a
majority of the disinterested members of the Board.  Until the end of the
foregoing six month period, the Underwriter and Fund shall continue to accept
and implement orders by the Company for the purchase (and redemption) of shares
of the Fund.

          7.6.  For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts.  The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.

          7.7.  If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.


                           ARTICLE VIII.  INDEMNIFICATION

          8.1.  INDEMNIFICATION BY THE COMPANY

          8.1(a).  The Company agrees to indemnify and hold harmless the Fund
and each trustee of the Board and officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or


                                          12
<PAGE>

litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:

               (i)   arise out of or are based upon any untrue statements or
          alleged untrue statements of any material fact contained in the
          Registration Statement or prospectus for the Contracts or contained in
          the Contracts or sales literature for the Contracts (or any amendment
          or supplement to any of the foregoing), or arise out of or are based
          upon the omission or the alleged omission to state therein a material
          fact required to be stated therein or necessary to make the statements
          therein not misleading, provided that this agreement to indemnify
          shall not apply as to any Indemnified Party if such statement or
          omission or such alleged statement or omission was made in reliance
          upon and in conformity with information furnished to the Company by or
          on behalf of the Fund for use in the Registration Statement or
          prospectus for the Contracts or in the Contracts or sales literature
          (or any amendment or supplement) or otherwise for use in connection
          with the sale of the Contracts or Fund shares; or
          
               (ii)  arise out of or as a result of statements or
          representations (other than statements or representations contained in
          the Registration Statement, prospectus or sales literature of the Fund
          not supplied by the Company, or persons under its control) or wrongful
          conduct of the Company or persons under its control, with respect to
          the sale or distribution of the Contracts or Fund Shares; or 
          
              (iii)  arise out of any untrue statement or alleged untrue
          statement of a material fact contained in a Registration Statement,
          prospectus, or sales literature of the Fund or any amendment thereof
          or supplement thereto or the omission or alleged omission to state
          therein a material fact required to be stated therein or necessary to
          make the statements therein not misleading if such a statement or
          omission was made in reliance upon information furnished to the Fund
          by or on behalf of the Company; or
          
               (iv)  arise as a result of any failure by the Company to provide
          the services and furnish the materials under the terms of this
          Agreement; or
          
                (v)  arise out of or result from any material breach of any
          representation and/or warranty made by the Company in this Agreement
          or arise out of or result from any other material breach of this
          Agreement by the Company, as limited by and in accordance with the
          provisions of Sections 8.1(b) and 8.1(c) hereof.


                                          13
<PAGE>

               8.1(b).  The Company shall not be liable under this
          indemnification provision with respect to any losses, claims, damages,
          liabilities or litigation incurred or assessed against an Indemnified
          Party as such may arise from such Indemnified Party's willful
          misfeasance, bad faith, or gross negligence in the performance of such
          Indemnified Party's duties or by reason of such Indemnified Party's
          reckless disregard of obligations or duties under this Agreement or to
          the Fund, whichever is applicable.
          
               8.1(c).  The Company shall not be liable under this
          indemnification provision with respect to any claim made against an
          Indemnified Party unless such Indemnified Party shall have notified
          the Company in writing within a reasonable time after the summons or
          other first legal process giving information of the nature of the
          claim shall have been served upon such Indemnified Party (or after
          such Indemnified Party shall have received notice of such service on
          any designated agent), but failure to notify the Company of any such
          claim shall not relieve the Company from any liability which it may
          have to the Indemnified Party against whom such action is brought
          otherwise than on account of this indemnification provision.  In case
          any such action is brought against the Indemnified Parties, the
          Company shall be entitled to participate, at its own expense, in the
          defense of such action.  The Company also shall be entitled to assume
          the defense thereof, with counsel satisfactory to the party named in
          the action.  After notice from the Company to such party of the
          Company's election to assume the defense thereof, the Indemnified
          Party shall bear the fees and expenses of any additional counsel
          retained by it, and the Company will not be liable to such party under
          this Agreement for any legal or other expenses subsequently incurred
          by such party independently in connection with the defense thereof
          other than reasonable costs of investigation.
          
               8.1(d).  The Indemnified Parties will promptly notify the Company
          of the commencement of any litigation or proceedings against them in
          connection with the issuance or sale of the Fund Shares or the
          Contracts or the operation of the Fund.
          
          8.2.  INDEMNIFICATION BY THE UNDERWRITER

          8.2(a).  The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:


                                          14
<PAGE>

          (i)    arise out of or are based upon any untrue statement or alleged
                 untrue statement of any material fact contained in the
                 Registration Statement or prospectus or sales literature of
                 the Fund (or any amendment or supplement to any of the
                 foregoing), or arise out of or are based upon the omission or
                 the alleged omission to state therein a material fact required
                 to be stated therein or necessary to make the statements
                 therein not misleading, provided that this agreement to
                 indemnify shall not apply as to any Indemnified Party if such
                 statement or omission or such alleged statement or omission
                 was made in reliance upon and in conformity with information
                 furnished to the Underwriter or Fund by or on behalf of the
                 Company for use in the Registration Statement or prospectus
                 for the Fund or in sales literature (or any amendment or
                 supplement) or otherwise for use in connection with the sale
                 of the Contracts or Fund shares; or
     
          (ii)   arise out of or as a result of statements or representations
                 (other than statements or representations contained in the
                 Registration Statement, prospectus or sales literature for the
                 Contracts not supplied by the Underwriter or persons under its
                 control) or wrongful conduct of the Fund, Adviser or
                 Underwriter or persons under their control, with respect to
                 the sale or distribution of the Contracts or Fund shares; or
     
          (iii)  arise out of any untrue statement or alleged untrue statement
                 of a material fact contained in a Registration Statement,
                 prospectus, or sales literature covering the Contracts, or any
                 amendment thereof or supplement thereto, or the omission or
                 alleged omission to state therein a material fact required to
                 be stated therein or necessary to make the statement or
                 statements therein not misleading, if such statement or
                 omission was made in reliance upon information furnished to
                 the Company by or on behalf of the Fund; or
     
          (iv)   arise as a result of any failure by the Fund to provide the
                 services and furnish the materials under the terms of this
                 Agreement (including a failure, whether unintentional or in
                 good faith or otherwise, to comply with the diversification
                 requirements specified in Article VI of this Agreement); or
     
          (v)    arise out of or result from any material breach of any
                 representation and/or warranty made by the Underwriter in this
                 Agreement or arise out of or result from any other material
                 breach of this Agreement by the Underwriter; as limited by and
                 in accordance with the provisions of Sections 8.2(b) and
                 8.2(c) hereof.


                                          15
<PAGE>

          8.2(b).  The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is applicable.

          8.2(c).  The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision.  In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof.  The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action.  After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.

          8.2(d).  The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.

          8.3.  INDEMNIFICATION BY THE FUND

          8.3(a).  The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Board or any member thereof,
are related to the operations of the Fund and:

          (i)  arise as a result of any failure by the Fund to provide the
               services and furnish the materials under the terms of this
               Agreement


                                          16
<PAGE>

                 (including a failure to comply with the diversification
                 requirements specified in Article VI of this Agreement);or
     
          (ii)   arise out of or result from any material breach of any
                 representation and/or warranty made by the Fund in this
                 Agreement or arise out of or result from any other material
                 breach of this Agreement by the Fund;
     
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.

          8.3(b).  The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.

          8.3(c).  The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision.  In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof.  The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action.  After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.

          8.3(d).  The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.


                             ARTICLE IX. APPLICABLE LAW


                                          17
<PAGE>

     9.1.  This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.

     9.2.  This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.


                               ARTICLE X. TERMINATION

     10.1.    This Agreement shall continue in full force and effect until the
first to occur of:

     (a)    termination by any party for any reason by sixty (60) days advance
            written notice delivered to the other parties; or
            
     (b)    termination by the Company by written notice to the Fund and the
            Underwriter with respect to any Portfolio based upon the Company's
            determination that shares of such Portfolio are not reasonably
            available to meet the requirements of the Contracts; or
     
     (c)    termination by the Company by written notice to the Fund and the
            Underwriter with respect to any Portfolio in the event any of the
            Portfolio's shares are not registered, issued or sold in accordance
            with applicable state and/or federal law or such law precludes the
            use of such shares as the underlying investment media of the
            Contracts issued or to be issued by the Company; or
     
     (d)    termination by the Company by written notice to the Fund and the
            Underwriter with respect to any Portfolio in the event that such
            Portfolio ceases to qualify as a Regulated Investment Company under
            Subchapter M of the Code or under any successor or similar
            provision, or if the Company reasonably believes that the Fund may
            fail to so qualify; or
               
     (e)    termination by the Company by written notice to the Fund and the
            Underwriter with respect to any Portfolio in the event that such
            Portfolio fails to meet the diversification requirements specified
            in Article VI hereof; or
     
     (f)    termination by either the Fund or the Underwriter by written notice
            to the Company, if either one or both of the Fund or the
            Underwriter


                                          18
<PAGE>

               respectively, shall determine, in their sole judgment exercised
               in good faith, that the Company and/or its affiliated companies
               has suffered a material adverse change in its business,
               operations, financial condition or prospects since the date of
               this Agreement or is the subject of material adverse publicity;
               or

          (g)  termination by the Company by written notice to the Fund and the
               Underwriter, if the Company shall determine, in its sole judgment
               exercised in good faith, that either the Fund or the Underwriter
               has suffered a material adverse change in its business,
               operations, financial condition or prospects since the date of
               this Agreement or is the subject of material adverse publicity;
               or
          
          (h)  termination by the Fund or the Underwriter by written notice to
               the Company, if the Company gives the Fund and the Underwriter
               the written notice specified in Section 1.6(b) hereof and at the
               time such notice was given there was no notice of termination
               outstanding under any other provision of this Agreement;
               provided, however any termination under this Section 10.1(h)
               shall be effective forty five (45) days after the notice
               specified in Section 1.6(b) was given.
          
          10.2.  EFFECT OF TERMINATION.  Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts").  Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts.  The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.

          10.3  The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. 
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption.  Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Fund or the
Underwriter 90 days notice of its intention to do so.


                                          19
<PAGE>


                             ARTICLE XI.    NOTICES

          Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.

          If to the Fund:
               82 Devonshire Street
               Boston, Massachusetts  02109
               Attention:  Treasurer

          If to the Company:

                         Life Insurance Company
               ----------
 
               ------------------------

               ------------------------

               Attention: 
                         --------------

          If to the Underwriter:
               82 Devonshire Street
               Boston, Massachusetts  02109
               Attention:  Treasurer


                            ARTICLE XII.  MISCELLANEOUS

          12.1  All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.

          12.2  Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.

          12.3  The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.

          12.4  This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.


                                          20
<PAGE>

          12.5  If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.

          12.6  Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby. 
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.

          12.7  The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.

          12.8.  This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement. 
The Company shall promptly notify the Fund and the Underwriter of any change in
control of the Company.

          12.9.  The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
                    
               (a)  the Company's annual statement (prepared under statutory
                    accounting principles) and annual report (prepared under
                    generally accepted accounting principles ("GAAP"), if any),
                    as soon as practical and in any event within 90 days after
                    the end of each fiscal year;
          
               (b)  the Company's quarterly statements (statutory) (and GAAP, if
                    any), as soon as practical and in any event within 45 days
                    after the end of each quarterly period:
          
               (c)  any financial statement, proxy statement, notice or report
                    of the Company sent to stockholders and/or policyholders, as
                    soon as practical after the delivery thereof to
                    stockholders; 


                                          21
<PAGE>

               (d)  any registration statement (without exhibits) and financial
                    reports of the Company filed with the Securities and
                    Exchange Commission or any state insurance regulator, as
                    soon as practical after the filing thereof;
          
               (e)  any other report submitted to the Company by independent
                    accountants in connection with any annual, interim or
                    special audit made by them of the books of the Company, as
                    soon as practical after the receipt thereof.

          IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.


                        LIFE INSURANCE COMPANY
          --------------

          By:       
                 --------------------------

          Name:     
                 --------------------------

          Title:    
                 --------------------------

          VARIABLE INSURANCE PRODUCTS FUND III

          By:  
               -------------------------
               Robert C. Pozen
               Senior Vice President

          FIDELITY DISTRIBUTORS CORPORATION

          By:  
               -------------------------
               Kevin J. Kelly
               Vice President


                                          22
<PAGE>

                                     SCHEDULE A
                     SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
                                          
Name of Separate Account  Policy Form Numbers of Contracts  Fidelity Fund(Class)
and Date Established             By Separate Account













                                          23
<PAGE>

                                     SCHEDULE B
                               PROXY VOTING PROCEDURE
                                          
                                          
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company.  The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.

1.   The number of proxy proposals is given to the Company by the Underwriter as
     early as possible before the date set by the Fund for the shareholder
     meeting to facilitate the establishment of tabulation procedures.  At this
     time the Underwriter will inform the Company of the Record, Mailing and
     Meeting dates.  This will be done verbally approximately two months before
     meeting.
     
2.   Promptly after the Record Date, the Company will perform a "tape run", or
     other activity, which will generate the names, addresses and number of
     units which are attributed to each contractowner/policyholder (the
     "Customer") as of the Record Date.  Allowance should be made for account
     adjustments made after this date that could affect the status of the
     Customers' accounts as of the Record Date.
     
     Note:  The number of proxy statements is determined by the activities
     described in Step #2.  The Company will use its best efforts to call in the
     number of Customers to Fidelity, as soon as possible, but no later than two
     weeks after the Record Date.
     
3.   The Fund's Annual Report no longer needs to be sent to each Customer by the
     Company either before or together with the Customers' receipt of a proxy
     statement.  Underwriter will provide the last Annual Report to the Company
     pursuant to the terms of Section 3.3 of the Agreement to which this
     Schedule relates.
     
4.   The text and format for the Voting Instruction Cards ("Cards" or "Card") is
     provided to the Company by the Fund.  The Company, at its expense, shall
     produce and personalize the Voting Instruction Cards.  The Legal Department
     of the Underwriter or its affiliate ("Fidelity Legal") must approve the
     Card before it is printed.  Allow approximately 2-4 business days for
     printing information on the Cards.  Information commonly found on the Cards
     includes:
          a.   name (legal name as found on account registration)
          b.   address
          c.   Fund or account number
          d.   coding to state number of units  
          e.   individual Card number for use in tracking and verification of
               votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)


                                          24
<PAGE>

5.   During this time, Fidelity Legal will develop, produce, and the Fund will
     pay for the Notice of Proxy and the Proxy Statement (one document). 
     Printed and folded notices and statements will be sent to Company for
     insertion into envelopes (envelopes and return envelopes are provided and
     paid for by the Insurance Company).  Contents of envelope sent to Customers
     by Company will include:
     
          a.   Voting Instruction Card(s)
          b.   One proxy notice and statement (one document)
          c.   return envelope (postage pre-paid by Company) addressed to
               the Company or its tabulation agent
          d.   "urge buckslip" - optional, but recommended. (This is a
               small, single sheet of paper that requests Customers to vote
               as quickly as possible and that their vote is important. 
               One copy will be supplied by the Fund.)
          e.   cover letter - optional, supplied by Company and reviewed
               and approved in advance by Fidelity Legal.
               
6.   The above contents should be received by the Company approximately 3-5
     business days before mail date.  Individual in charge at Company reviews
     and approves the contents of the mailing package to ensure correctness and
     completeness.  Copy of this approval sent to Fidelity Legal.
     
7.   Package mailed by the Company.
     *    The Fund MUST allow at least a 15-day solicitation time to the
          Company as the shareowner.  (A 5-week period is recommended.) 
          Solicitation time is calculated as calendar days from (but NOT
          including) the meeting, counting backwards.
          
8.   Collection and tabulation of Cards begins.  Tabulation usually takes place
     in another department or another vendor depending on process used.  An
     often used procedure is to sort Cards on arrival by proposal into vote
     categories of all yes, no, or mixed replies, and to begin data entry.
     
     Note:  Postmarks are not generally needed.  A need for postmark
     information would be due to an insurance company's internal procedure
     and has not been required by Fidelity in the past.
               
9.   Signatures on Card checked against legal name on account registration which
     was printed on the Card.
     
     Note:  For Example, If the account registration is under "Bertram C.
     Jones, Trustee," then that is the exact legal name to be printed on
     the Card and is the signature needed on the Card.


                                          25
<PAGE>

10.   If Cards are mutilated, or for any reason are illegible or are not signed
      properly, they are sent back to Customer with an explanatory letter, a
      new Card and return envelope.  The mutilated or illegible Card is
      disregarded and considered to be NOT RECEIVED for purposes of vote
      tabulation.  Any Cards that have "kicked out" (e.g. mutilated, illegible)
      of the procedure are "hand verified," i.e., examined as to why they did
      not complete the system.  Any questions on those Cards are usually
      remedied individually.
      
11.   There are various control procedures used to ensure proper tabulation of
      votes and accuracy of that tabulation.  The most prevalent is to sort the
      Cards as they first arrive into categories depending upon their vote; an
      estimate of how the vote is progressing may then be calculated.  If the
      initial estimates and the actual vote do not coincide, then an internal
      audit of that vote should occur.  This may entail a recount.
      
12.   The actual tabulation of votes is done in units which is then converted
      to shares.  (It is very important that the Fund receives the tabulations
      stated in terms of a percentage and the number of SHARES.)  Fidelity
      Legal must review and approve tabulation format.
      
13.   Final tabulation in shares is verbally given by the Company to Fidelity
      Legal on the morning of the meeting not later than 10:00 a.m. Boston
      time.  Fidelity Legal may request an earlier deadline if required to
      calculate the vote in time for the meeting.
      
14.   A Certification of Mailing and Authorization to Vote Shares will be
      required from the Company as well as an original copy of the final vote. 
      Fidelity Legal will provide a standard form for each Certification.
      
15.   The Company will be required to box and archive the Cards received from
      the Customers.  In the event that any vote is challenged or if otherwise
      necessary for legal, regulatory, or accounting purposes, Fidelity Legal
      will be permitted reasonable access to such Cards.
      
16.   All approvals and "signing-off" may be done orally, but must always be
      followed up in writing.


                                          26
<PAGE>

                                      SCHEDULE C


      Other investment companies currently available under the Contracts:














                                          27

<PAGE>
                                                       October 13, 1998

VIA EDGAR

First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653


RE:  GROUP VEL ACCOUNT OF FIRST ALLMERICA 
     FINANCIAL LIFE INSURANCE COMPANY
     FILE NO: 333-06383 AND 811-7663

Gentlemen:

In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
the Group VEL Account on Form S-6 under the Securities Act of 1933 with respect
to the Company's individual flexible premium variable life insurance policies.

I am of the following opinion:

1.   The Group VEL Account is a separate account of the Company validly existing
     pursuant to the Massachusetts Insurance Code and the regulations issued
     thereunder.

2.   The assets held in the Group VEL Account equal to the reserves and other
     Policy liabilities of the Policies which are supported by the Group VEL
     Account are not chargeable with liabilities arising out of any other
     business the Company may conduct.

3.   The group flexible premium variable life insurance policies, when issued in
     accordance with the Prospectuses contained in the Post-Effective Amendment
     to the Registration Statement and upon compliance with applicable local
     law, will be legal and binding obligations of the Company in accordance
     with their terms and when sold will be legally issued, fully paid and non-
     assessable.

In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.

I hereby consent to the filing of this opinion as an exhibit to this Post-
Effective Amendment to the Registration Statement of the Group VEL Account on
Form S-6  filed under the Securities Act of 1933.

                                   Very truly yours,

     
                                   /s/ Sheila B. St. Hilaire     
                                   Sheila B. St. Hilaire
                                   Assistant Vice President and Counsel
               



<PAGE>


                                                            October 16, 1998
          
VIA EDGAR

First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653


RE:  GROUP VEL ACCOUNT OF FIRST ALLMERICA 
     FINANCIAL LIFE INSURANCE COMPANY
     FILE NO:  333-06383 AND 811-7663

Gentlemen:

This opinion is furnished in connection with the filing by First Allmerica
Financial Life Insurance Company of the Post-Effective Amendment to the
Registration Statement on Form S-6 of its flexible premium variable life
insurance policies ("Policies") allocated to the Group VEL Account under the
Securities Act of 1933.  The prospectuses included in the Post-Effective
Amendment to the Registration Statement describes the Policies.  I am familiar
with and have provided actuarial advice concerning the preparation of the Post-
Effective amendment to the Registration Statement, including exhibits.

In my professional opinion, the illustration of death benefits and cash values
included in Appendix C of the prospectuses, based on the assumptions stated in
the illustrations, are consistent with the provisions of the Policy.  The rate
structure of the Policies has not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for a person age 30 or a person
age 45 than to prospective purchasers of Policies for people at other ages or
underwriting classes.  

I am also of the opinion that  the aggregate fees and charges under the Policy
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company

I hereby consent to the use of this opinion as an exhibit to the Post-Effective
Amendment of the Registration Statement.

                                        Sincerely,
     
               
                                        /s/ William M. Mawdsley
                                        William M. Mawdsley, FSA, MAAA
                                        Vice President and Actuary



<PAGE>


                          CONSENT OF INDEPENDENT ACCOUNTANTS


We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 5 to the Registration Statement of the Group VEL
Account of First Allmerica Financial Life Insurance Company on Form S-6 of our
report dated February 3, 1998, relating to the financial statements of First
Allmerica Financial Life Insurance Company, and our report dated March 25, 1998,
relating to the financial statements of the Group VEL Account of First Allmerica
Financial Life Insurance Company, both of which appear in such Prospectus.  We
also consent to the reference to us under the heading "Independent Accountants"
in such Prospectus.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Boston, Massachusetts
October 15, 1998




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