<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. 8
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)
Mary Eldridge, Secretary
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 (date) 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 Rule 24f-2 Notice for the issuer's fiscal year ended December 31, 1998
was filed on or before March 30, 1999.
<PAGE>
This Post-Effective Amendment No. 8 under the Securities Act of 1933 is being
filed for the purposes of adding a supplement to Prospectus C of the Group
VEL Separate Account of First Allmerica Financial Life Insurance Company
dated May 1, 1999 and to generally update corporate information for the
Company and the Registrant in Part C. All other pertinent information
regarding this Registration Statement, including the Prospectuses previously
filed in Registrant's Post-Effective Amendment No. 7 on April 26, 1999, and
are incorporated by reference herein.
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; Fidelity VIP; Fidelity VIP II; T. Rowe Price; DGPF; and
INVESCO VIF; Investment Advisory Services to
the Trust; Investment Advisory Services to
Fidelity VIP; Investment Advisory Services to
Fidelity 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; Fidelity VIP; Fidelity 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; Fidelity VIP; Fidelity 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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
33...............................Not Applicable
34...............................Not Applicable
35...............................Distribution
36...............................Not Applicable
37...............................Not Applicable
38...............................Summary; Distribution
39...............................Summary; Distribution
40...............................Not Applicable
41...............................The Company, Distribution
42...............................Not Applicable
43...............................Not Applicable
44...............................Premium Payments; Certificate Value and Surrender Value
45...............................Not Applicable
46...............................Certificate Value and Surrender Value; Federal Tax Considerations
47...............................The Company
48...............................Not Applicable
49...............................Not Applicable
50...............................The Group VEL Account
51...............................Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate Provisions
52...............................Addition, Deletion or Substitution of Investments
53...............................Federal Tax Considerations
54...............................Not Applicable
55...............................Not Applicable
56...............................Not Applicable
57...............................Not Applicable
58...............................Not Applicable
59...............................Not Applicable
</TABLE>
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS B
- ----------- -----------------------
<S> <C>
1................................Cover Page
2................................Cover Page
3................................Not Applicable
4................................Distribution
5................................The Company, The Group VEL Account
6................................The Group VEL Account
7................................Not Applicable
8................................Not Applicable
9................................Legal Proceedings
10...............................Summary; Description of the Company, The Group VEL Account and the Underlying
Funds; The Certificate; Certificate Termination and Reinstatement; Other
Certificate Provisions
11...............................Summary; The Trust, Investment Objectives and Policies
12...............................Summary; The Trust
13...............................Summary; The Trust; MFVAT; DGPF and T. Rowe Price; Investment Advisory
Services to the Trust; Investment Advisory Services to MFVAT; Investment
Advisory Services to DGPF; Investment Advisory Services to T. Rowe Price;
Charges and Deductions
14...............................Summary; Enrollment Form for a Certificate
15...............................Summary; Enrollment Form for a Certificate; Premium Payments;
Allocation of Net Premiums
16...............................The Group VEL Account; The Trust; MFVAT; DGPF and T. Rowe Price;
Premium Payments; Allocation of Net Premiums
17...............................Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18...............................The Group VEL Account; The Trust; DGPF and T. Rowe Price; 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
35...............................Distribution
36...............................Not Applicable
37...............................Not Applicable
38...............................Summary; Distribution
39...............................Summary; Distribution
40...............................Not Applicable
</TABLE>
<PAGE>
<TABLE>
<S> <S>
41...............................The Company, Distribution
42...............................Not Applicable
43...............................Not Applicable
44...............................Premium Payments; Certificate Value and Surrender Value
45...............................Not Applicable
46...............................Certificate Value and Surrender Value; Federal Tax Considerations
47...............................The Company
48...............................Not Applicable
49...............................Not Applicable
50...............................The Group VEL Account
51...............................Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate Provisions
52...............................Addition, Deletion or Substitution of Investments
53...............................Federal Tax Considerations
54...............................Not Applicable
55...............................Not Applicable
56...............................Not Applicable
57...............................Not Applicable
58...............................Not Applicable
59...............................Not Applicable
</TABLE>
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS C
- ----------- -----------------------
<S> <C>
1................................Cover Page
2................................Cover Page
3................................Not Applicable
4................................Distribution
5................................The Company, The Group VEL Account
6................................The Group VEL Account
7................................Not Applicable
8................................Not Applicable
9................................Legal Proceedings
10...............................Summary; Description of the Company, The Group VEL Account and the Underlying
Funds; The Certificate; Certificate Termination and Reinstatement; Other
Certificate Provisions
11...............................Summary; DGPF; Investment Objectives and Policies
12...............................Summary; DGPF
13...............................Summary; DGPF and the Trust; Investment Advisory Services; and Charges and
Deductions
14...............................Summary; Enrollment Form for a Certificate
15...............................Summary; Enrollment Form for a Certificate; Premium Payments;
Allocation of Net Premiums
16...............................The Group VEL Account; DGPF and the Trust; Premium Payments; Allocation of
Net Premiums
17...............................Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18...............................The Group VEL Account; DGPF and the Trust; Premium Payments Reports; Voting
Rights
20...............................Not Applicable
21...............................Summary; Certificate Loans; Other Certificate Provisions
22...............................Other Certificate Provisions
23...............................Not Required
24...............................Other Certificate Provisions
25...............................The Company
26...............................Not Applicable
27...............................The Company
28...............................Directors and Principal Officers of the Company
29...............................The Company
30...............................Not Applicable
31...............................Not Applicable
32...............................Not Applicable
33...............................Not Applicable
34...............................Not Applicable
35...............................Distribution
36...............................Not Applicable
37...............................Not Applicable
38...............................Summary; Distribution
39...............................Summary; Distribution
40...............................Not Applicable
41...............................The Company, Distribution
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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>
GROUP VEL ACCOUNT
(EXECUTIVESOLUTIONS)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1999
THIS SUPPLEMENT SUPPLANTS THE SUPPLEMENT DATED JUNE 21, 1999
***
A new Sub-Account is available under the Certificate. The Sub-Account will
invest exclusively in shares of the U.S. Growth Series of the Delaware Group
Premium Fund, Inc. As such, the following information supplements the
corresponding sections of the Prospectus. Please consult the Prospectus for
the full text of each supplemented section.
U.S. Growth Series is added after DelCap Series in the listing of Funds on
page 1 of the Prospectus.
Under UNDERLYING FUNDS ("FUNDS") on page 6 of the Prospectus, U.S. Growth
Series is inserted after DelCap Series.
Under INVESTMENT OPTIONS on page 12 of the Prospectus, the second and third
sentences are amended to read as follows:
The Separate Account is currently comprised of 47 Sub-Accounts. Of these 47
Sub-Accounts, 17 are available to the Certificates.
The following information on the U.S. Growth Series is added to the Annual
Fund Expenses table and footnotes on page 13 of the Prospectus under CHARGES
OF THE UNDERLYING FUNDS:
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER VOLUNTARY (AFTER APPLICABLE (AFTER ANY WAIVERS/
UNDERLYING FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- -------- ------------- ---------------
<S> <C> <C> <C>
U.S. Growth Series @................ 0.58% 0.17% 0.75%(1)(2)
</TABLE>
@ The Aggressive Growth Series and U.S. Growth Series had not commenced
operations as of December 31, 1998. Expenses shown are based on estimated and
annualized amounts. Actual expenses may be greater or less than shown. The
REIT Series commenced operations on May 1, 1998. Expenses shown are based on
annualized amounts.
(1) For the fiscal year ended December 31, 1998, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a
percentage of average daily net assets were 0.86% for DelCap Series, 0.89%
for Social Awareness Series, 1.02% for REIT Series, 1.67% for Emerging
Markets Series, 0.81% for Strategic Income Series, and 0.88% for
International Equity Series. Total expenses are anticipated to be 0.92% for
Aggressive Growth Series and 0.82% for U.S. Growth Series.
(2) The investment adviser for the Growth & Income Series (formerly known as
"Decatur Total Return Series"), Devon Series, DelCap Series, U.S. Growth
Series, Aggressive Growth Series, Social Awareness Series, REIT Series, Small
Cap Value Series, Trend Series, Delaware Balanced Series (formerly known as
"Delaware Series"), Delchester Series, Capital Reserves Series, Strategic
Income Series, and Cash Reserve Series is Delaware Management Company, a
series of Delaware Management Business Trust ("Delaware Management"). The
investment adviser for the International Equity Series, Emerging Markets
Series is Delaware International Advisers Ltd. ("Delaware International").
The investment advisers for the Series of DGPF have agreed from November 1,
1999 through April 30, 2000 to maintain the voluntary management fee waivers
and expense reimbursements that expired on October 31, 1999. As a result,
expenses will not exceed 1.50% for the Emerging Markets Series; 0.95% for the
International Equity Series; 0.85% for DelCap Series, Aggressive Growth
<PAGE>
Series, Social Awareness Series, REIT Series, Small Cap Value Series, Trend
Series, 0.75% for U.S. Growth Series, and 0.80% for all other Series. In
addition, effective May 1, 1999, Delaware Management voluntarily elected to
cap its management fee for the Growth and Income Series at 0.60%
indefinitely. The fee ratios shown above have been restated, if necessary, to
reflect the new voluntary limitations which took effect on November 1, 1999.
The declaration of a voluntary expense limitation does not bind the
investment advisers to declare future expense limitations with respect to
these Funds. Pursuant to a vote of the Fund's shareholders on March 17, 1999,
a new management fee structure based on average daily net assets was
approved. The above ratios have been restated to reflect the new management
fee structure which took effect on May 1, 1999.
Under THE SEPARATE ACCOUNT on page 16 of the Prospectus, the third sentence
of the second paragraph is amended as follows:
The Separate Account currently has 47 Sub-Accounts, of which 17 are available
to the Certificates.
Under DELAWARE GROUP PREMIUM FUND, INC. on page 17 of the Prospectus, the
following is amended as follows:
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. Sixteen
investment portfolios are available under the Certificates: Growth & Income,
Devon Series, DelCap Series, U.S. Growth Series, Aggressive Growth Series,
Social Awareness Series, REIT Series, Small Cap Value Series, Trend Series,
International Equity Series, Emerging Markets Series, Delaware Balanced
Series, Delchester Series, Capital Reserves Series, Strategic Income Series,
and Cash Reserve Series (collectively, the "Underlying Funds"). The assets of
each Underlying Fund are held separate from the assets of the other
Underlying Funds. Each Underlying Fund operates as a separate investment
vehicle, and the income or losses of one Underlying Fund have no effect on
the investment performance of another Underlying Fund. Shares of the
Underlying Funds are not offered to the general public but solely to separate
accounts of life insurance companies.
The investment adviser for the Growth & Income Series, Devon Series, DelCap
Series, U.S. Growth Series, Aggressive Growth Series, Social Awareness
Series, REIT Series, Small Cap Value Series, Trend Series, Delaware Balanced
Series, Delchester Series, Capital Reserves Series, Strategic Income Series,
and Cash Reserve Series is Delaware Management Company, a series of Delaware
Management Business Trust ("Delaware Management"). The investment adviser for
the International Equity Series, and the Emerging Markets Series is Delaware
International Advisers Ltd. ("Delaware International").
The following summary of the investment objective of the U.S. Growth Series
is inserted as the fourth Fund summary under INVESTMENT OBJECTIVES AND
POLICIES on page 17 of the Prospectus:
U.S. GROWTH SERIES -- seeks to achieve maximum capital appreciation.
Under INVESTMENT ADVISORY SERVICES on page 19 of the Prospectus, the
following is amended as follows:
Investment advisers are paid an annual fee based on the average daily net
assets of their respective Underlying Funds for management services. The Cash
Reserve Series management fee rate is as follows: 0.45% on the first $500
million, 0.40% on the next $500 million, 0.35% on the next $1,500 million and
0.30% on assets in excess of $2,500 million; the Capital Reserves Series
management fee rate is as follows: 0.50% on the first $500 million, 0.475% on
the next $500 million, 0.45% on the next $1,500 million and 0.425% on assets
in excess of $2,500 million; the Growth & Income Series, U.S. Growth Series,
Delchester Series, Delaware Balanced Series, Devon Series and Strategic
Income Series management fee rate is as follows: 0.65% on the first $500
million, 0.60% on the next $500 million, 0.55% on the next $1,500 million and
0.50% on assets in excess of $2,500 million; the DelCap Series, Aggressive
Growth Series, Small Cap Value Series, Trend Series, Social Awareness Series,
and REIT Series, management fee rate is as follows: 0.75% on the first $500
million, 0.70% on the next $500 million, 0.65% on the next $1,500 million and
0.60% on assets in excess of $2,500 million; the International Equity Series
management fee rate is as follows: 0.85% on the first $500 million,
<PAGE>
0.80% on the next $500 million, 0.75% on the next $1,500 million and 0.70% on
assets in excess of $2,500 million; and the Emerging Markets Series
management fee rate is as follows: 1.25% on the first $500 million, 1.20% on
the next $500 million, 1.15% on the next $1,500 million and 1.10% on assets
in excess of $2,500 million; all per year. Regarding the Growth and Income
Series, the investment adviser has voluntarily elected to cap the management
fee at 0.60%, indefinitely.
***
The following is added as the second paragraph under CHARGES AND DEDUCTIONS:
Upon full surrender of the Policy within the first three policy years, in
certain situations the Company will, upon written request, refund a
percentage of that portion of the previously paid Premium Expense Charge that
exceeded our local, state and federal tax expenses. In the first Policy year,
the amount of the refund is 100% of the portion of the previously paid
Premium Expense Charge that exceeded our local, state, and federal tax
expenses, 70% in the second Policy year, and 35% in the third Policy year.
The following conditions apply:
- - The original owner of the Policy and certificates thereunder is a
corporation, a corporate grantor trust, or an individual or trust under a
corporate sponsored collateral assignment split dollar agreement, and the
ownership has not been changed;
- - The request to surrender the Policy and all certificates thereunder must be
received prior to the end of the third Policy year; and
- - The Policy and certificates have not been exchanged to another carrier.
SUPPLEMENT DATED DECEMBER 1, 1999
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
(IN MILLIONS) 1999 1998 1999 1998
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Premiums......................................... $ 1.0 $487.6 $ 953.4 $1,478.1
Universal life and investment product policy
fees........................................... 91.4 75.0 262.9 217.2
Net investment income............................ 102.3 145.5 411.7 439.8
Net realized investment (losses) gains........... (14.6) 8.3 109.4 53.4
Other income..................................... 25.0 23.2 79.2 71.1
------ ------ -------- --------
Total revenues............................... 205.1 739.6 1,816.6 2,259.6
------ ------ -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses............... 88.1 438.2 971.1 1,338.5
Policy acquisition expenses...................... 17.4 111.2 222.0 341.6
Sales practice litigation expense................ -- 31.0 -- 31.0
Other operating expenses......................... 59.5 124.3 283.0 327.6
------ ------ -------- --------
Total benefits, losses and expenses.......... 165.0 704.7 1,476.1 2,038.7
Income from continuing operations before federal
income taxes........................................ 40.1 34.9 340.5 220.9
------ ------ -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.......................................... (2.7) 22.1 69.9 65.3
Deferred......................................... 13.3... (22.0) 12.0 (21.8)
------ ------ -------- --------
Total federal income tax expense............. 10.6 0.1 81.9 43.5
------ ------ -------- --------
Income from continuing operations before minority
interest............................................ 29.5 34.8 258.6 177.4
Minority interest................................ -- (16.5) (39.9) (43.1)
------ ------ -------- --------
Income from continuing operations.................... 29.5 18.3 218.7 134.3
Loss from operations of discontinued business (less
applicable income taxes (benefit) of $(8.4) and
$(8.6) for the quarters ended September 30, 1999 and
1998, and $(10.1) and $(6.2) for the nine months
ended September 30, 1999 and 1998).................. (14.9) (16.1) (18.2) (11.7)
Loss on disposal of group life and health business,
including provision of $73.0 for operating losses
during phase-out period for the quarter and nine
months ended September 30, 1999 (less applicable
income taxes (benefit) of $(16.4)).................. (30.5) -- (30.5) --
------ ------ -------- --------
Net (loss) income.................................... $(15.9) $ 2.2 $ 170.0 $ 122.6
====== ====== ======== ========
</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>
(UNAUDITED) (AUDITED)
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
- ------------------------------------ ------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$4,013.8 and $7,520.8)................................. $ 3,979.5 $ 7,683.9
Equity securities-at fair value (cost of $65.3 and
$253.1)................................................ 71.4 397.1
Mortgage loans.......................................... 546.4 562.3
Policy loans............................................ 164.9 154.3
Real estate and other long term investments............. 176.6 163.1
--------- ---------
Total investments................................... 4,938.8 8,960.7
--------- ---------
Cash and cash equivalents................................. 800.9 504.0
Accrued investment income................................. 71.5 141.0
Premiums, accounts and notes receivable................... 79.4 510.5
Deferred policy acquisition costs......................... 1,164.6 1,161.2
Reinsurance receivable on paid and unpaid losses, benefits
and unearned premiums................................... 472.1 1,136.4
Deferred federal income taxes............................. 19.5 19.4
Other assets.............................................. 213.5 530.6
Closed Block assets....................................... 776.3 803.1
Separate account assets................................... 15,102.9 13,697.7
--------- ---------
Total assets........................................ $23,639.5 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,862.8 $ 2,802.2
Outstanding claims and losses........................... 233.9 2,815.9
Unearned premiums....................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities............................................ 2,960.9 2,637.0
--------- ---------
Total policy liabilities and accruals............... 6,064.2 9,098.3
--------- ---------
Expenses and taxes payable................................ 443.5 681.9
Reinsurance premiums payable.............................. 5.6 50.2
Short-term debt........................................... -- 221.3
Closed Block liabilities.................................. 848.0 872.0
Separate account liabilities.............................. 15,102.1 13,691.5
--------- ---------
Total liabilities................................... 22,463.4 24,615.2
--------- ---------
Minority interest......................................... -- 532.9
Commitments and contingencies (Note 9)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares authorized,
500,001 shares issued & outstanding..................... 5.0 5.0
Additional paid-in capital................................ 569.0 444.0
Accumulated other comprehensive income.................... (65.1) 169.2
Retained earnings......................................... 667.2 1,698.3
--------- ---------
Total shareholder's equity.......................... 1,176.1 2,316.5
--------- ---------
Total liabilities and shareholder's equity.......... $23,639.5 $27,464.6
========= =========
</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>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
COMMON STOCK................................................ $ 5.0 $ 5.0
-------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 444.0 453.7
Capital contribution.................................... 125.0 --
Loss on change of interest -- Allmerica P&C............. -- (9.6)
-------- --------
Balance at end of period................................ 569.0 444.1
-------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized (depreciation) appreciation on investments:
Balance at beginning of period............................ 169.1 209.3
Net depreciation on available-for-sale securities......... (287.4) (85.8)
Benefit for deferred federal income taxes................. 126.1 30.0
Minority interest......................................... -- 14.2
Distribution of subsidiaries (Note 4)..................... (72.9) --
-------- --------
Other comprehensive income.............................. (234.2) (41.6)
-------- --------
Balance at end of period.................................. (65.1) 167.7
-------- --------
RETAINED EARNINGS
Balance at beginning of period............................ 1,698.3 1,567.4
Net income................................................ 170.0 122.6
Dividends to shareholders................................. -- (50.0)
Distribution of subsidiaries (Note 4)..................... (1,201.1) --
-------- --------
Balance at end of period.................................. 667.2 1,640.0
-------- --------
Total shareholder's equity.......................... $1,176.1 $2,256.8
======== ========
</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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
(IN MILLIONS) 1999 1998 1999 1998
- ------------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) income........................................ $ (15.9) $ 2.2 $ 170.0 $122.6
--------- ------- ------- ------
Other comprehensive income:
Net depreciation on available-for-sale securities...... (17.9) (125.0) (287.4) (85.8)
Benefit for deferred federal income taxes.............. 31.8 43.7 126.1 30.0
Minority interest...................................... (31.8) 25.8 -- 14.2
Distribution of subsidiaries (Note 4).................. (72.9) -- (72.9) --
--------- ------- ------- ------
Other comprehensive loss............................. (90.8) (55.5) (234.2) (41.6)
--------- ------- ------- ------
Comprehensive (loss) income............................ $ (106.7) $ (53.3) $ (64.2) $ 81.0
========= ======= ======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
(IN MILLIONS) 1999 1998
- ------------- --------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 170.0 $ 122.6
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Minority interest................................... 39.9 43.1
Net realized gains.................................. (108.9) (54.4)
Net amortization and depreciation................... 24.0 13.3
Loss on the disposal of group life and health
business............................................ 30.5 --
Deferred federal income taxes....................... (4.3) (21.8)
Change in deferred acquisition costs................ (135.6) (143.2)
Change in premiums and notes receivable, net of
reinsurance......................................... (52.5) 42.9
Change in accrued investment income................. 10.1 2.9
Change in policy liabilities and accruals, net...... 94.2 211.4
Change in reinsurance receivable.................... (38.2) (115.0)
Change in expenses and taxes payable................ 22.8 (46.0)
Separate account activity, net...................... 5.2 1.2
Other, net.......................................... (2.9) (59.0)
--------- --------
Net cash provided by (used in) operating
activities.......................................... 54.3 (2.0)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities..................... 2,199.7 1,514.7
Proceeds from disposals of equity securities.............. 375.6 228.3
Proceeds from disposals of other investments.............. 26.4 78.9
Proceeds from mortgages matured or collected.............. 86.5 147.5
Purchase of available-for-sale fixed maturities........... (2,015.7) (2,086.6)
Purchase of equity securities............................. (71.5) (111.3)
Purchase of other investments............................. (113.7) (221.3)
Capital expenditures...................................... (23.4) (4.3)
Purchase of minority interest............................. (325.5) (125.0)
Distribution of subsidiaries.............................. (202.2) --
Other investing activities................................ -- (7.9)
--------- --------
Net cash provided by (used in) investing
activities.......................................... (63.8) (587.0)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit
funds................................................... 1,368.0 1,167.1
Withdrawals from contractholder deposit funds............. (1,014.8) (456.5)
Change in short term debt................................. (180.8) 25.5
Change in long term debt.................................. -- (2.6)
Dividends paid to shareholder............................. -- (35.0)
Proceeds from issuance of common stock.................... 125.0 --
--------- --------
Net cash provided by financing activities........... 297.4 698.5
--------- --------
Net change in cash and cash equivalents..................... 287.9 109.5
Net change in cash held in the Closed Block................. 9.0 21.1
Cash and cash equivalents, beginning of period.............. 504.0 213.9
--------- --------
Cash and cash equivalents, end of period.................... $ 800.9 $ 344.5
========= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of First Allmerica
Financial Life Insurance Company ("FAFLIC" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information.
The interim consolidated financial statements of First Allmerica Financial Life
Insurance Company ("FAFLIC", or the "Company"), a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC"), include the accounts of its
wholly-owned life insurance subsidiary, Allmerica Financial Life Insurance and
Annuity Company ("AFLIAC"), its non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), Advantage Insurance Network,
Inc., and Allmerica Trust Company, N.A. Prior to July 1, 1999, the consolidated
financial statements of FAFLIC included Allmerica Property & Casualty Companies,
Inc. ("Allmerica P&C") (an 84.52%-owned non-insurance holding company) and
various other non-insurance subsidiaries. On July 1, 1999, the Company
distributed these subsidiaries to AFC (See Note 4). The Closed Block assets and
liabilities at September 30, 1999 and December 31, 1998 are presented in the
consolidated financial statements as single line items. Results of operations
for the Closed Block for the nine month period ended September 30, 1999 and 1998
are included in other income in the consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated.
Prior to the aforementioned July 1999 distribution of subsidiaries, minority
interest reflects the Company's investment in Allmerica P&C and its only
significant subsidiary, The Hanover Insurance Company ("Hanover"). Hanover's
wholly owned subsidiary is Citizens Corporation, the holding company for
Citizens Insurance Company of America ("Citizens"). Minority interest in 1998
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 necessary for a fair
presentation of the financial position and results of operations. The results of
operations for the nine months ended September 30, 1999 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 1998 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. This
statement is effective for fiscal years beginning after June 15, 2000. The
Company is currently assessing the impact of the adoption of Statement No. 133.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance 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 adoption of SoP No. 97-3 had no effect on the results of
operations or financial position of the Company.
F-6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver, which provides for the sale of the
Company's EBS business effective March 1, 2000. The Company has recorded a
$30.5 million loss, net of taxes, on the disposal of its group life and health
business.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheet has not been
segregated between continuing and discontinued operations. At September 30,
1999, the discontinued segment had assets of approximately $525.4 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $472.6 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $89.1 million and $97.8 million for the quarters ended
September 30, 1999 and 1998, respectively, and $276.2 million and $299.1 million
for the nine months ended September 30, 1999 and 1998, respectively.
4. PARENT COMPANY TRANSACTIONS
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include transfer of FAFLIC's ownership of APY, as well as several
other non-insurance subsidiaries, from FAFLIC to AFC. FAFLIC retained its
ownership of AFLIAC and certain other subsidiaries. AFC contributed to FAFLIC
capital of $125 million and agreed to maintain FAFLIC's statutory surplus at
specified levels during the following six years. In addition, any dividend from
FAFLIC to AFC during 2000 and 2001 requires the prior approval of the
Commonwealth of Massachusetts Insurance Commissioner (the "Commissioner"). This
transaction was approved by the Commissioner on May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.0 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million and total revenue of $1,198.1 million. FAFLIC's
results of operations in 1999 include $107.2 million of net income associated
with these subsidiaries through the second quarter.
On April 1, 1999, May 5, 1999, and May 11, 1999, Allmerica P&C redeemed 3,246.8
shares, 1,273.9 shares, and 4,142.0 shares of its issued and outstanding common
stock owned by AFC for $125.0 million, $50.0 million, and $175.0 million,
respectively. The April 1, 1999 transaction consisted of $75.4 million and
$49.6 million of cash. The May 5, 1999 transaction consisted of $50.0 million of
cash. The May 11, 1999 transaction consisted of $147.1 million of cash and $27.9
million of short-term securities. After the May 11, 1999 transaction, FAFLIC's
ownership of Allmerica P&C increased to 84.52%.
F-7
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1998, Allmerica P&C redeemed 3,289.5 shares of its issued and outstanding
common stock owned by AFC for $125.0 million, thereby increasing FAFLIC's
ownership of Allmerica P&C by 4.3%. The 1998 transaction consisted of $124.0
million of securities and $1.0 million of cash.
5. SIGNIFICANT TRANSACTIONS
On December 3, 1998 Citizens Acquisition Corporation, a wholly owned subsidiary
of Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 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 Company's consolidated results of operations include minority interest in
Citizens prior to December 3, 1998. The unaudited pro forma information below
presents consolidated results of operation as if the acquisition had occurred at
the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1998
- ------------- --------
<S> <C>
Revenue..................................................... $3,405.1
========
Net realized capital gains included in revenue.............. $ 59.8
========
Income before taxes and minority interest................... 272.9
Income taxes................................................ (47.2)
Minority interest:
Equity in earnings...................................... (42.6)
--------
Net income.................................................. $ 183.1
========
</TABLE>
6. FEDERAL INCOME TAXES
Federal income tax expense for the nine months ended September 30, 1999 and
1998, 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.
7. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income is a net
pre-tax contribution from the Closed Block of $3.3 million and $10.4 million for
the quarter and nine months ended September 30, 1999,
F-8
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, compared to $0.1 million and $6.1 million for the quarter and nine
months ended September 30, 1998, respectively. Summarized financial information
of the Closed Block is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------------- ------------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $407.2
and $399.1)............................................. $398.4 $414.2
Mortgage loans............................................ 137.5 136.0
Policy loans.............................................. 203.0 210.9
Cash and cash equivalents................................. 0.4 9.4
Accrued investment income................................. 15.0 14.1
Deferred policy acquisition costs......................... 13.6 15.6
Other assets.............................................. 8.4 2.9
------ ------
Total assets................................................ $776.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $840.2 $862.9
Other liabilities......................................... 7.8 9.1
------ ------
Total liabilities........................................... $848.0 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
(IN MILLIONS) 1999 1998 1999 1998
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Premiums.......................................... $ 8.0 $ 9.1 $ 43.6 $ 46.3
Net investment income............................. 13.9 13.5 40.5 39.9
Net realized investment losses.................... (0.7) (2.0) (0.2) (0.4)
------ ------ ------ ------
Total revenues........................................ 21.2 20.6 83.9 85.8
Benefits and expenses
Policy benefits................................... 17.2 19.5 71.6 76.9
Policy acquisition expenses....................... 0.6 0.9 1.7 2.2
Other operating expenses.......................... 0.1 0.1 0.2 0.6
------ ------ ------ ------
Total benefits and expenses........................... 17.9 20.5 73.5 79.7
------ ------ ------ ------
Contribution from the Closed Block.................... $ 3.3 $ 0.1 $ 10.4 $ 6.1
====== ====== ====== ======
</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.
8. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Asset Accumulation. Within these broad areas, the Company
conducts business principally in three operating segments. These segments are
Risk Management, Allmerica Financial Services, and Allmerica Asset Management.
The separate financial information of each segment is presented 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 Company's reportable segments is included below.
F-9
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1999, the Company reorganized its Property and Casualty and Corporate Risk
Management Services operations within the Risk Management segment. Under the new
structure, the Risk Management segment manages its business through five
distribution channels identified as Hanover North, Hanover South, Citizens
Midwest, Allmerica Voluntary Benefits, and Allmerica Specialty. During the
second quarter of 1999, the Company approved a plan to exit its group life and
health business, consisting of its EBS business, its AGU business and its
reinsurance pool business. Results of operations from this business, relating to
both the current and the prior periods, have been segregated and reported as a
component of discontinued operations in the Consolidated Statements of Income.
Operating results from this business were previously reported in the Allmerica
Voluntary Benefits and Allmerica Specialty distribution channels. Prior to 1999,
results of the group life and health business were included in the Corporate
Risk Management Services segment, while all other Risk Management business was
reflected in the Property and Casualty segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and the affinity group property and casualty
business. Allmerica Specialty offers special niche property and casualty
products in selected markets. On July 1, 1999, AFC made certain changes to its
corporate structure. As a result, FAFLIC distributed its interest in the
property and casualty business after that date.
The 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 Guaranteed Investment
Contracts ("GICs") such as traditional GIC, synthetic GIC and other funding
agreements. Funding agreements are investment contracts issued to institutional
buyers, such as money market funds, corporate cash management programs and
securities lending collateral programs, which typically have short maturities
and periodic interest rate resets based on an index such as LIBOR. 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. As a result of the aforementioned change in AFC's corporate
structure, FAFLIC distributed its interest in the registered investment advisor
as of July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments 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.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, 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 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, segment income should not be construed as a substitute for
net income determined in accordance with generally accepted accounting
principles.
F-10
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized below is financial information with respect to business segments for
the periods indicated.
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
(IN MILLIONS) 1999 1998 1999 1998
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment revenues:
Risk Management................................ $-- $549.0 $ 1075.2 $1,666.5
------ ------ -------- --------
Asset Accumulation
Allmerica Financial Services................. 197.7 173.4 592.6 537.0
Allmerica Asset Management................... 38.6 32.8 113.4 86.6
------ ------ -------- --------
Subtotal................................... 236.3 206.2 706.0 623.6
------ ------ -------- --------
Corporate...................................... (0.3) 0.3 0.4 2.0
Intersegment revenues.......................... 1.8 (3.3) (0.7) (5.8)
------ ------ -------- --------
Total segment revenues including Closed
Block.................................... 237.8 752.2 1,780.9 2,286.3
Adjustments to segment revenues:
Adjustment for Closed Block................ (18.1) (20.9) (73.7) (80.1)
Net realized (losses) gains................ (14.6) 8.3 109.4 53.4
------ ------ -------- --------
Total revenues............................... $205.1 $739.6 $1,816.6 $2,259.6
====== ====== ======== ========
Segment income (loss) before income taxes and
minority interest:
Risk Management................................ $-- $ 50.2 $ 85.1 $ 122.8
------ ------ -------- --------
Asset Accumulation
Allmerica Financial Services................. 54.9 37.5 152.1 123.9
Allmerica Asset Management................... 4.7 6.9 17.2 17.0
------ ------ -------- --------
Subtotal................................... 59.6 44.4 169.3 140.9
------ ------ -------- --------
Corporate...................................... (3.6) (8.1) (28.9) (29.3)
------ ------ -------- --------
Segment income before income taxes and minority
interest.......................................... 56.0 86.5 225.5 234.4
Adjustments to segment income:
Net realized investment gains, net of
amortization................................. (15.9) 4.9 115.0 43.8
Other items.................................... -- (56.5) -- (57.3)
------ ------ -------- --------
Income from continuing operations before taxes and
minority interest................................. $ 40.1 $ 34.9 $ 340.5 $ 220.9
====== ====== ======== ========
</TABLE>
F-11
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
--------------------------------- ---------------------------------
(UNAUDITED) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Risk Management........................ $ 571.0 $ 6,216.8 $ 6.6 $ 167.5
--------- --------- -------- --------
Asset Accumulation
Allmerica Financial Services....... 20,842.7 19,403.1 1,157.6 993.1
Allmerica Asset Management......... 2,225.8 1,810.9 0.4 0.6
--------- --------- -------- --------
Subtotal........................... 23,068.5 21,214.0 1,158.0 993.7
Corporate.............................. -- 33.8 -- --
--------- --------- -------- --------
Total............................ $23,639.5 $27,464.6 $1,164.6 $1,161.2
========= ========= ======== ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, 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, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. The Company recognized a $31.0 million pre-tax expense
during the third quarter of 1998 related to this litigation. Although the
Company believes that this expense reflects appropriate recognition of its
obligation under the settlement, this estimate assumes the availability of
insurance coverage for certain claims, and the estimate may be revised based on
the amount of reimbursement actually tendered by AFC's insurance carriers and
based on changes in the Company's estimate of the ultimate cost of the benefits
to be provided to members of the class.
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.
F-12
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Investment
Growth Grade Income Money Market
------------ ---------------- --------------
<S> <C> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ 462 $ 269 $ 251
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. . . . . . . . . - - -
------------ ---------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 269 251
LIABILITIES: - - -
------------ ---------------- --------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 462 $ 269 $ 251
============ ================ ==============
============ ================ ==============
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 462 269 251
============ ================ ==============
$ 462 $ 269 $ 251
============ ================ ==============
============ ================ ==============
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . 200 200 200
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 2.309593 $ 1.344856 $ 1.254094
<CAPTION>
SELECT
EQUITY INDEX GOVERNMENT BOND AGGRESSIVE GROWTH
-------------- ----------------- -------------------
<S> <C> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ 528 $ 259 $ 428
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. . . . . . . . . - - -
-------------- ----------------- -------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528 259 428
LIABILITIES: - - -
-------------- ----------------- -------------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 528 $ 259 $ 428
============== ================= ===================
============== ================= ===================
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 528 259 428
============== ================= ===================
$ 528 $ 259 $ 428
============== ================= ===================
============== ================= ===================
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . .
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . 200 200 200
$ 2.638364 $ 1.293095 $ 2.139771
<CAPTION>
Select
Select Growth Growth and Income
--------------- -------------------
<S> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ 545 $ 442
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. . . . . . . . . - -
--------------- -------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545 442
LIABILITIES: - -
--------------- -------------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 545 $ 442
=============== ===================
=============== ===================
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 545 442
=============== ===================
$ 545 $ 442
=============== ===================
=============== ===================
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . .
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . 200 200
$ 2.723955 $ 2.208552
</TABLE>
(a) For the period ended September 30, 1999, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Select Select
Select Value International Capital
Opportunity Equity Appreciation
-------------- --------------- --------------
<S> <C> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ 327 $ 366 $ 409
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. . . . . . . . . - - -
============== =============== ==============
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 366 409
LIABILITIES:
-------------- --------------- --------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327 $ 366 $ 409
============== =============== ==============
============== =============== ==============
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 327 366 409
============== =============== ==============
$ 327 $ 366 $ 409
============== =============== ==============
============== =============== ==============
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . 200 200 200
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 1.632495 $ 1.830828 $ 2.043611
<CAPTION>
Select Select
Emerging Strategic Fidelity VIP
Markets(a) Growth(a) High Income
------------ ----------- --------------
<S> <C> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) - - 296
Investment in shares of T. Rowe Price International Series, Inc.. . . . . - - -
Investment in shares of Delaware Group Premium Fund, Inc. . . . . . . . . - - -
------------ ----------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 296
LIABILITIES:
============ =========== ==============
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 296
============ =========== ==============
============ =========== ==============
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . - - 296
============ =========== ==============
$ - $ - $ 296
============ =========== ==============
============ =========== ==============
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . - - 200
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 1.000000 $1.000000 $ 1.477842
<CAPTION>
Fidelity VIP Fidelity VIP
Equity-Income Growth
--------------- --------------
<S> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) 404 548
Investment in shares of T. Rowe Price International Series, Inc.. . . . . - -
Investment in shares of Delaware Group Premium Fund, Inc. . . . . . . . . - -
=============== ==============
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404 548
LIABILITIES:
--------------- --------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 404 $ 548
=============== ==============
=============== ==============
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 404 548
=============== ==============
$ 404 $ 548
=============== ==============
=============== ==============
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . 200 200
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 2.021273 $ 2.739310
</TABLE>
(a) For the period ended September 30, 1999, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Fidelity VIP Fidelity VIP II Fidelity VIP II
Overseas Asset Manager Contrafund(a)
-------------- ----------------- -----------------
<S> <C> <C> <C>
Investments in shares of Allmerica Investment Trust . . . . . . . . . . . $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) 350 365 -
Investment in shares of T. Rowe Price International Series, Inc.. . . . . - - -
Investment in shares of Delaware Group Premium Fund, Inc. . . . . . . . . - - -
-------------- ----------------- -----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 365 -
LIABILITIES:
-------------- ----------------- -----------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 350 $ 365 $ -
-------------- ----------------- -----------------
-------------- ----------------- -----------------
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 350 365 -
-------------- ----------------- -----------------
$ 350 $ 365 $ -
-------------- ----------------- -----------------
-------------- ----------------- -----------------
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . .
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . 200 200 -
$ 1.749731 $ 1.826863 $ 1.000000
<CAPTION>
FIDELITY VIP III FIDELITY VIP II
Balanced Fund(a) Index 500(a)
------------------ -----------------
<S> <C> <C>
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. . . . . . . . . - -
------------------ -----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
LIABILITIES:
------------------ -----------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
------------------ -----------------
------------------ -----------------
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . - -
------------------ -----------------
$ - $ -
------------------ -----------------
------------------ -----------------
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . .
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . - -
$ 1.000000 $ 1.000000
<CAPTION>
T. Rowe Price
International Stock(a)
------------------------
<S> <C>
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. . . . . . . . . -
------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
LIABILITIES:
------------------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
------------------------
------------------------
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . -
------------------------
$ -
------------------------
------------------------
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . .
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . -
$ 1.000000
</TABLE>
(a) For the period ended September 30, 1999, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
DGPF DGPF
Decatur DGPF Capital
Total Return(a) Delchester(a) Reserves(a)
================= =============== =============
<S> <C> <C> <C>
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. . . . . . . . . - - -
================= =============== =============
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
LIABILITIES:
----------------- --------------- -------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
================= =============== =============
================= =============== =============
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
================= =============== =============
$ - $ - $ -
================= =============== =============
================= =============== =============
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . - - -
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 1.000000 $ 1.000000 $ 1.000000
<CAPTION>
DGPF
Cash DGPF DGPF
Reserve(a) DelCap(a) Delaware(a)
============ =========== =-===========
<S> <C> <C> <C>
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. . . . . . . . . - - -
============ =========== =-===========
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
LIABILITIES:
------------ ----------- -------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
============ =========== =-===========
============ =========== =-===========
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
============ =========== =-===========
$ - $ - $ -
============ =========== =-===========
============ =========== =-===========
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . - - -
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 1.000000 $1.000000 $ 1.000000
<CAPTION>
DGPF
DGPF Small Cap
International Equity Value(a)
====================== ============
<S> <C> <C>
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. . . . . . . . . 327 -
====================== ============
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327 -
LIABILITIES:
---------------------- ------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327 $ -
====================== ============
====================== ============
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 327 -
====================== ============
$ 327 $ -
====================== ============
====================== ============
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . 200 -
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 1.634763 $ 1.000000
</TABLE>
(a) For the period ended September 30, 1999, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
DGPF DGPF
DGPF Strategic DGPF Emerging
Trend(a) Income(a) Devon(a) Markets(a)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
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. . . . . . . . . - - - -
----------- ----------- ----------- ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
LIABILITIES:
----------- ----------- ----------- ------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ -
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
----------- ----------- ----------- ------------
$ - $ - $ - $ -
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . - - - -
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $1.000000 $1.000000 $1.000000 $ 1.000000
<CAPTION>
DGPF DGPF
Social DGPF Aggressive
Awareness(a) REIT(a) Growth(a)
-------------- ----------- ------------
<S> <C> <C> <C>
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. . . . . . . . . - - -
-------------- ----------- ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
LIABILITIES:
-------------- ----------- ------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
-------------- ----------- ------------
Net asset distribution by category:
Variable life policies. . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
-------------- ----------- ------------
$ - $ - $ -
-------------- ----------- ------------
Units outstanding, September 30, 1999. . . . . . . . . . . . . . . . - - -
Net asset value per unit, September 30, 1999 . . . . . . . . . . . . $ 1.000000 $1.000000 $ 1.000000
</TABLE>
(a) For the period ended September 30, 1999, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Growth Investment Grade Income Money Market
-------------- --------------------------- ----------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 12 $ 9
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - - -
-------------- --------------------------- ----------------
Net investment income (loss). . . . . . . . . . . . . . . 3 12 9
-------------- --------------------------- ----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 45 - -
Net realized gain (loss) from sales of investments. . . . - - -
-------------- --------------------------- ----------------
Net realized gain (loss) . . . . . . . . . . . . . . . 45 - -
Net unrealized gain (loss). . . . . . . . . . . . . . . . (22) (17) -
-------------- --------------------------- ----------------
Net realized and unrealized gain (loss) . . . . . . . 23 (17) -
-------------- --------------------------- ----------------
Net increase in net assets from operations . . . . . . $ 26 $ (5) $ 9
-------------- --------------------------- ----------------
-------------- --------------------------- ----------------
<CAPTION>
Equity Index Government Bond Select Aggressive Growth
---------------- ------------------- ----------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $ 11 $ -
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - - -
---------------- ------------------- ----------------------------
Net investment income (loss). . . . . . . . . . . . . . . 4 11 -
---------------- ------------------- ----------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 1 - -
Net realized gain (loss) from sales of investments. . . . - - -
---------------- ------------------- ----------------------------
Net realized gain (loss) . . . . . . . . . . . . . . . 1 - -
Net unrealized gain (loss). . . . . . . . . . . . . . . . 10 (11) 35
---------------- ------------------- ----------------------------
Net realized and unrealized gain (loss) . . . . . . . 11 (11) 35
---------------- ------------------- ----------------------------
Net increase in net assets from operations . . . . . . $ 15 $ - $ 35
---------------- ------------------- ----------------------------
---------------- ------------------- ----------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Select Growth Select Growth and Income
----------------- ----------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 4
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - -
----------------- ----------------------------
Net investment income (loss). . . . . . . . . . . . . . . - 4
----------------- ----------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 18 34
Net realized gain (loss) from sales of investments. . . . - -
----------------- ----------------------------
Net realized gain (loss) . . . . . . . . . . . . . . . 18 34
Net unrealized gain (loss). . . . . . . . . . . . . . . . (12) (18)
----------------- ----------------------------
Net realized and unrealized gain (loss) . . . . . . . 6 16
----------------- ----------------------------
Net increase in net assets from operations . . . . . . $ 6 $ 20
----------------- ----------------------------
----------------- ----------------------------
<CAPTION>
Select Value Opportunity Select International Equity
---------------------------- -----------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - -
---------------------------- -----------------------------
Net investment income (loss). . . . . . . . . . . . . . . - -
---------------------------- -----------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 21 -
Net realized gain (loss) from sales of investments. . . . - -
---------------------------- -----------------------------
Net realized gain (loss) . . . . . . . . . . . . . . . 21 -
Net unrealized gain (loss). . . . . . . . . . . . . . . . (66) 25
---------------------------- -----------------------------
Net realized and unrealized gain (loss) . . . . . . . (45) 25
---------------------------- -----------------------------
Net increase in net assets from operations . . . . . . $ (45) $ 25
---------------------------- -----------------------------
---------------------------- -----------------------------
<CAPTION>
Select Capital Appreciation Fidelity VIP High Income
------------------------------- --------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 26
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - -
------------------------------- --------------------------
Net investment income (loss). . . . . . . . . . . . . . . - 26
------------------------------- --------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 1 1
Net realized gain (loss) from sales of investments. . . . - -
------------------------------- --------------------------
Net realized gain (loss) . . . . . . . . . . . . . . . 1 1
Net unrealized gain (loss). . . . . . . . . . . . . . . . 16 (16)
------------------------------- --------------------------
Net realized and unrealized gain (loss) . . . . . . . 17 (15)
------------------------------- --------------------------
Net increase in net assets from operations . . . . . . $ 17 $ 11
------------------------------- --------------------------
------------------------------- --------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Fidelity VIP Equity-Income Fidelity VIP Growth
---------------------------- -----------------------
<S> <C>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 1
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - -
---------------------------- -----------------------
Net investment income (loss). . . . . . . . . . . . . . . 6 1
---------------------------- -----------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 13 55
Net realized gain (loss) from sales of investments. . . . - -
---------------------------- -----------------------
Net realized gain (loss) . . . . . . . . . . . . . . . 13 55
Net unrealized gain (loss). . . . . . . . . . . . . . . . (7) (1)
---------------------------- -----------------------
Net realized and unrealized gain (loss) . . . . . . . 6 54
---------------------------- -----------------------
Net increase in net assets from operations . . . . . . $ 12 $ 55
---------------------------- -----------------------
---------------------------- -----------------------
<CAPTION>
Fidelity VIP Overseas Fidelity VIP II Asset Manager
----------------------- -------------------------------
<S>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 12
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . - -
----------------------- -------------------------------
Net investment income (loss). . . . . . . . . . . . . . . 5 12
----------------------- -------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . 8 15
Net realized gain (loss) from sales of investments. . . . - -
----------------------- -------------------------------
Net realized gain (loss) . . . . . . . . . . . . . . . 8 15
Net unrealized gain (loss). . . . . . . . . . . . . . . . 31 (19)
----------------------- -------------------------------
Net realized and unrealized gain (loss) . . . . . . . 39 (4)
----------------------- -------------------------------
Net increase in net assets from operations . . . . . . $ 44 $ 8
----------------------- -------------------------------
----------------------- -------------------------------
<CAPTION>
DGPF International Equity
---------------------------
<S>
INVESTMENT INCOME:
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 7
EXPENSES:
Mortality and expense risk fees . . . . . . . . . . . . . -
---------------------------
Net investment income (loss). . . . . . . . . . . . . . . 7
---------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors . . . -
Net realized gain (loss) from sales of investments. . . . -
---------------------------
Net realized gain (loss) . . . . . . . . . . . . . . . -
Net unrealized gain (loss). . . . . . . . . . . . . . . . 13
---------------------------
Net realized and unrealized gain (loss) . . . . . . . 13
---------------------------
Net increase in net assets from operations . . . . . . $ 20
---------------------------
---------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Growth Investment Grade Income
-------------------------- ------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 3 $ 12
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . 45 -
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . (22) (17)
-------------------------- ------------------------------
Net increase (decrease) in net assets from operations. . . . . . . 26 (5)
-------------------------- ------------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . - -
Other transfers from (to) the General Account. . . . . . . . . . . . 7 3
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
-------------------------- ------------------------------
Net increase (decrease) in net assets from policy transactions . . 7 3
-------------------------- ------------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 33 (2)
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 429 271
-------------------------- ------------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 462 $ 269
-------------------------- ------------------------------
-------------------------- ------------------------------
<CAPTION>
Money Market Equity Index
------------------------ -----------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 9 $ 4
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . - 1
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . - 10
------------------------ -----------------------
Net increase (decrease) in net assets from operations. . . . . . . 9 15
------------------------ -----------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . - -
Other transfers from (to) the General Account. . . . . . . . . . . . - 10
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
------------------------ -----------------------
Net increase (decrease) in net assets from policy transactions . . - 10
------------------------ -----------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 9 25
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 242 503
------------------------ -----------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 251 $ 528
------------------------ -----------------------
------------------------ -----------------------
<CAPTION>
Government Bond
-------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 11
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . -
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . (11)
-------------------------
Net increase (decrease) in net assets from operations. . . . . . . -
-------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . -
Transfers between sub-accounts (including fixed account), net. . . . -
Other transfers from (to) the General Account. . . . . . . . . . . . 1
Net increase (decrease) in investment by Sponsor . . . . . . . . . . -
-------------------------
Net increase (decrease) in net assets from policy transactions . . 1
-------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 1
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 258
-------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 259
-------------------------
-------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Select Aggressive Growth Select Growth
---------------------------- -----------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ - $ -
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . - 18
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 35 (12)
---------------------------- -----------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 35 6
---------------------------- -----------------------
Net increase (decrease) in net assets from operations. . . . . . . 35 6
---------------------------- -----------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . - -
Other transfers from (to) the General Account. . . . . . . . . . . . 5 16
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
---------------------------- -----------------------
Net increase (decrease) in net assets from policy transactions . . 5 16
---------------------------- -----------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 40 22
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 388 523
---------------------------- -----------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 428 $ 545
---------------------------- -----------------------
---------------------------- -----------------------
<CAPTION>
Select Growth and Income Select Value Opportunity
---------------------------- --------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 4 $ -
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . 34 21
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . (18) (66)
---------------------------- --------------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 16 (45)
---------------------------- --------------------------
Net increase (decrease) in net assets from operations. . . . . . . 20 (45)
---------------------------- --------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . - -
Other transfers from (to) the General Account. . . . . . . . . . . . 4 -
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
---------------------------- --------------------------
Net increase (decrease) in net assets from policy transactions . . 4 -
---------------------------- --------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 24 (45)
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 418 372
---------------------------- --------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442 $ 327
---------------------------- --------------------------
---------------------------- --------------------------
<CAPTION>
Select International Equity
-------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ -
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . -
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 25
-------------------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 25
-------------------------------
Net increase (decrease) in net assets from operations. . . . . . . 25
-------------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . -
Transfers between sub-accounts (including fixed account), net. . . . -
Other transfers from (to) the General Account. . . . . . . . . . . . 5
Net increase (decrease) in investment by Sponsor . . . . . . . . . . -
-------------------------------
Net increase (decrease) in net assets from policy transactions . . 5
-------------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 30
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 336
-------------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 366
-------------------------------
-------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Select Capital Appreciation Fidelity VIP High Income
----------------------------- --------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ - $ 26
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . 1 1
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 16 (16)
----------------------------- --------------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 17 (15)
----------------------------- --------------------------
Net increase (decrease) in net assets from operations. . . . . . . 17 11
----------------------------- --------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . - 1
Other transfers from (to) the General Account. . . . . . . . . . . . (2) -
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
----------------------------- --------------------------
Net increase (decrease) in net assets from policy transactions . . (2) 1
----------------------------- --------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 15 12
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 394 284
----------------------------- --------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 409 $ 296
----------------------------- --------------------------
----------------------------- --------------------------
<CAPTION>
Fidelity VIP Equity-Income Fidelity VIP Growth
------------------------------ -----------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 6 $ 1
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . 13 55
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . (7) (1)
------------------------------ -----------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 6 54
------------------------------ -----------------------
Net increase (decrease) in net assets from operations. . . . . . . 12 55
------------------------------ -----------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . (1) 1
Other transfers from (to) the General Account. . . . . . . . . . . . - -
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
------------------------------ -----------------------
Net increase (decrease) in net assets from policy transactions . . (1) 1
------------------------------ -----------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 11 56
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 393 492
------------------------------ -----------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 404 $ 548
------------------------------ -----------------------
------------------------------ -----------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Fidelity VIP Overseas Fidelity VIP II Asset Manager
------------------------- -------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 5 $ 12
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . 8 15
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 31 (19)
------------------------- -------------------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 39 (4)
------------------------- -------------------------------
Net increase (decrease) in net assets from operations. . . . . . . 44 8
------------------------- -------------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . - -
Transfers between sub-accounts (including fixed account), net. . . . - (1)
Other transfers from (to) the General Account. . . . . . . . . . . . - -
Net increase (decrease) in investment by Sponsor . . . . . . . . . . - -
------------------------- -------------------------------
Net increase (decrease) in net assets from policy transactions . . - (1)
------------------------- -------------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 44 7
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 306 358
------------------------- -------------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 350 $ 365
------------------------- -------------------------------
------------------------- -------------------------------
<CAPTION>
DGPF International Equity
-----------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . . . $ 7
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . -
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . 13
-----------------------------
Net realized and unrealized gain (loss). . . . . . . . . . . . . . 13
-----------------------------
Net increase (decrease) in net assets from operations. . . . . . . 20
-----------------------------
FROM POLICY TRANSACTIONS:
Net premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Insurance and other charges . . . . . . . . . . . . . . . . . . . . -
Transfers between sub-accounts (including fixed account), net. . . . -
Other transfers from (to) the General Account. . . . . . . . . . . . -
Net increase (decrease) in investment by Sponsor . . . . . . . . . . -
-----------------------------
Net increase (decrease) in net assets from policy transactions . . -
-----------------------------
Net increase (decrease) in net assets. . . . . . . . . . . . . . . 20
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 307
-----------------------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327
-----------------------------
-----------------------------
</TABLE>
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
thirty-seven Sub-Accounts. Each Sub-Account invests exclusively in a
corresponding investment portfolio of the Allmerica Investment Trust (the Trust)
managed by Allmerica Financial Investment Management Services, Inc. (AFIMS) a
wholly-owned subsidiary of Allmerica Financial Life Insurance and Annuity
Company; or of the Variable Insurance Products Fund (Fidelity VIP) or the
Variable Insurance Products Fund II (Fidelity VIP II), all of which are 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 Management Company or Delaware International Advisers Ltd. The
Trust, Fidelity VIP, Fidelity VIP II, Fidelity VIP III, T. Rowe Price, and DGPF
(the Funds) are open-end, management investment companies registered under the
1940 Act.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. 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>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<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, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998, 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/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 18 and Note 20,
which are as of March 19, 1999 and April 1, 1999, respectively
<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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................................ $2,303.9 $2,311.0 $2,236.3
Universal life and investment product policy fees....... 296.6 237.3 197.2
Net investment income................................... 613.7 641.8 670.8
Net realized investment gains........................... 62.6 76.5 66.8
Other income............................................ 142.6 117.6 108.4
-------- -------- --------
Total revenues...................................... 3,419.4 3,384.2 3,279.5
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment
expenses.............................................. 2,050.2 2,004.6 1,957.0
Policy acquisition expenses............................. 452.8 425.1 470.1
Sales practice litigation............................... 31.0 -- --
Loss from exiting reinsurance pools..................... 25.3 -- --
Loss from cession of disability income business......... -- 53.9 --
Restructuring costs..................................... 13.0 -- --
Other operating expenses................................ 559.0 523.7 503.2
-------- -------- --------
Total benefits, losses and expenses................. 3,131.3 3,007.3 2,930.3
-------- -------- --------
Income before federal income taxes.......................... 288.1 376.9 349.2
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current................................................. 67.6 83.3 96.8
Deferred................................................ (15.4) 14.2 (15.7)
-------- -------- --------
Total federal income tax expense.................... 52.2 97.5 81.1
-------- -------- --------
Income before minority interest............................. 235.9 279.4 268.1
Minority interest....................................... (55.0) (79.4) (74.6)
-------- -------- --------
Net income.................................................. $ 180.9 $ 200.0 $ 193.5
======== ======== ========
</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) 1998 1997
- ------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$7,520.8 and $6,992.8)................................. $ 7,683.9 $ 7,253.5
Equity securities at fair value (cost of $253.1 and
$341.1)................................................ 397.1 479.0
Mortgage loans.......................................... 562.3 567.5
Real estate............................................. 20.4 50.3
Policy loans............................................ 154.3 141.9
Other long-term investments............................. 142.7 148.3
--------- ---------
Total investments................................... 8,960.7 8,640.5
--------- ---------
Cash and cash equivalents................................. 504.0 213.9
Accrued investment income................................. 141.0 141.8
Deferred policy acquisition costs......................... 1,161.2 965.5
--------- ---------
Reinsurance receivables:
Future policy benefits.................................. 322.6 307.1
Outstanding claims, losses and loss adjustment
expenses............................................... 652.2 626.7
Other................................................... 161.6 106.4
--------- ---------
Total reinsurance receivables....................... 1,136.4 1,040.2
--------- ---------
Deferred federal income taxes............................. 19.4 --
Premiums, accounts and notes receivable................... 510.5 554.4
Other assets.............................................. 530.6 373.0
Closed Block assets....................................... 803.1 806.7
Separate account assets................................... 13,697.7 9,755.4
--------- ---------
Total assets........................................ $27,464.6 $22,491.4
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,802.2 $ 2,598.5
Outstanding claims, losses and loss adjustment
expenses............................................... 2,815.9 2,825.0
Unearned premiums....................................... 843.2 846.8
Contractholder deposit funds and other policy
liabilities............................................ 2,637.0 1,852.7
--------- ---------
Total policy liabilities and accruals............... 9,098.3 8,123.0
--------- ---------
Expenses and taxes payable................................ 681.9 662.6
Reinsurance premiums payable.............................. 50.2 37.7
Short-term debt........................................... 221.3 33.0
Deferred federal income taxes............................. -- 12.9
Long-term debt............................................ -- 2.6
Closed Block liabilities.................................. 872.0 885.6
Separate account liabilities.............................. 13,691.5 9,749.7
--------- ---------
Total liabilities................................... 24,615.2 19,507.1
--------- ---------
Minority interest......................................... 532.9 748.9
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................................ 444.0 453.7
Accumulated other comprehensive income.................... 169.2 209.3
Retained earnings......................................... 1,698.3 1,567.4
--------- ---------
Total shareholder's equity.......................... 2,316.5 2,235.4
--------- ---------
Total liabilities and shareholder's equity.......... $27,464.6 $22,491.4
========= =========
</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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................................ $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 453.7 392.4 392.4
Contributed from parent................................. -- 61.3 --
Loss on change of interest -- Allmerica P&C............. (9.7) -- --
-------- -------- --------
Balance at end of period................................ 444.0 453.7 392.4
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period.......................... 209.3 131.4 153.0
Appreciation (depreciation) during the period:
Net (depreciation) appreciation on available-for-sale
securities............................................ (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal income taxes... 28.9 (59.8) 11.8
Minority interest....................................... 13.4 (33.2) 1.7
-------- -------- --------
(40.1) 77.9 (21.6)
-------- -------- --------
Balance at end of period................................ 169.2 209.3 131.4
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period.......................... 1,567.4 1,367.4 1,173.9
Net income.............................................. 180.9 200.0 193.5
Dividend to shareholder................................. (50.0) -- --
-------- -------- --------
Balance at end of period................................ 1,698.3 1,567.4 1,367.4
-------- -------- --------
Total shareholder's equity.......................... $2,316.5 $2,235.4 $1,896.2
======== ======== ========
</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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $180.9 $200.0 $193.5
------ ------ ------
Other comprehensive income:
Net (depreciation) appreciation on available-for-sale
securities.............................................. (82.4) 170.9 (35.1)
Benefit (provision) for deferred federal income taxes..... 28.9 (59.8) 11.8
Minority interest......................................... 13.4 (33.2) 1.7
------ ------ ------
Other comprehensive income.............................. (40.1) 77.9 (21.6)
------ ------ ------
Comprehensive income...................................... $140.8 $277.9 $171.9
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<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) 1998 1997 1996
- ------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 180.9 $ 200.0 $ 193.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest................................... 55.0 79.4 74.6
Net realized gains.................................. (62.7) (77.8) (66.8)
Net amortization and depreciation................... 20.7 31.6 44.7
Deferred federal income taxes....................... (15.4) 14.2 (15.7)
Loss from exiting reinsurance pools................. 25.3 -- --
Sales practice litigation expense................... 31.0 -- --
Payment related to exiting reinsurance pools........ (30.3) -- --
Loss from cession of disability income business..... -- 53.9 --
Payment related to cession of disability income
business............................................ -- (207.0) --
Change in deferred acquisition costs................ (185.8) (189.7) (73.9)
Change in premiums and notes receivable, net of
reinsurance payable................................. 56.7 (15.1) (16.8)
Change in accrued investment income................. 0.8 7.1 16.7
Change in policy liabilities and accruals, net...... 168.1 (134.9) (184.3)
Change in reinsurance receivable.................... (115.4) 27.2 123.8
Change in expenses and taxes payable................ (3.3) 49.4 26.0
Separate account activity, net...................... (48.5) -- 5.2
Other, net.......................................... (63.8) 20.4 38.5
--------- --------- ---------
Net cash provided by (used in) operating
activities.......................................... 13.3 (141.3) 165.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities.................... 1,929.1 2,892.9 3,985.8
Proceeds from disposals of equity securities............ 285.3 162.7 228.7
Proceeds from disposals of other investments............ 120.8 116.3 99.3
Proceeds from mortgages matured or collected............ 171.2 204.7 176.9
Purchase of available-for-sale fixed maturities......... (2,588.4) (2,596.0) (3,771.1)
Purchase of equity securities........................... (119.9) (67.0) (90.9)
Purchase of other investments........................... (274.4) (175.0) (168.0)
Capital expenditures.................................... (0.7) (15.3) (12.8)
Purchase of minority interest in Citizens Corporation... (195.9) -- --
Other investing activities, net......................... 5.1 1.3 4.3
--------- --------- ---------
Net cash (used in) provided by investing
activities.......................................... (667.8) 524.6 452.2
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit
funds.................................................. 1,419.2 457.6 268.7
Withdrawals from contractholder deposit funds........... (625.0) (647.1) (905.0)
Change in short-term debt............................... 188.3 (5.4) 10.4
Change in long-term debt................................ (2.6) (0.1) (0.1)
Dividend paid to parent................................. (50.0) -- --
Dividends paid to minority shareholders................. -- (9.4) (3.9)
Additional paid-in capital.............................. -- 0.1 --
Subsidiary treasury stock purchased, at cost............ (1.0) (140.0) (42.0)
--------- --------- ---------
Net cash provided by (used in) financing
activities.......................................... 928.9 (344.3) (671.9)
--------- --------- ---------
Net change in cash and cash equivalents..................... 274.4 39.0 (54.2)
Net change in cash held in the Closed Block................. 15.7 (1.0) (6.5)
Cash and cash equivalents, beginning of period.............. 213.9 175.9 236.6
--------- --------- ---------
Cash and cash equivalents, end of period.................... $ 504.0 $ 213.9 $ 175.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 7.3 $ 3.6 $ 18.6
Income taxes paid........................................... $ 133.5 $ 66.3 $ 72.0
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of First Allmerica Financial Life
Insurance Company ("FAFLIC", or the "Company"), a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC"), include the accounts of its wholly
owned life insurance subsidiary Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), its non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property and Casualty
Companies, Inc. ("Allmerica P&C") (a 70.06%-owned non-insurance holding
company). The Closed Block (Note 1B) assets and liabilities at December 31, 1998
and 1997, 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, 1998 and 1997, and the years
then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
On December 3, 1998, the Company acquired all of the outstanding common stock of
Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary of
Hanover, a wholly owned subsidiary of Allmerica P&C) that it did not already own
in exchange for cash of $195.9 million (Note 3). The acquisition has been
recognized as a purchase. The minority interest acquired totaled $158.5 million.
A total of $40.8 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.
Allmerica P&C 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.
Minority interest relates to the Company's investment in Allmerica P&C and its
only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's wholly 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 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
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 as of FAFLIC's demutualization 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. 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. FAFLIC allocated to the Closed Block
assets in an amount that is expected to produce cash flows which, together with
future revenues from the Closed Block Business, are reasonably sufficient to
support the Closed Block Business, including provision for payment of policy
benefits, certain future expenses and taxes and for
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continuation of policyholder dividend scales payable 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 as 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 the inception of the Closed
Block, 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 at inception.
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, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), 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.
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 shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company adopted a plan to dispose of all real estate assets by
the end of 1998. As of December 31, 1998, there were 7 properties remaining in
the Company's real estate portfolio, all of which are being actively marketed.
As a result of the plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less costs of disposal.
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 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, swap contracts 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. Default swap contracts entered into
for investment purposes are accounted for using the fair value method, with
changes in fair value, if any, reported in realized investment gains and losses
in earnings. Premium paid to the Company on default swap contracts is reported
in net investment income in earnings. 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. Any
ineffective swaps or futures hedges are recognized currently in realized
investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition 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
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
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 7 1/4%
for life insurance and 2 1/2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE 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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
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. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income. Prior to the merger on July 16,
1997, Allmerica P&C and its subsidiaries filed a separate 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 ("Statement
No. 109"). These differences result primarily from loss and LAE reserves, policy
reserves, policy acquisition expenses, and unrealized appreciation or
depreciation on investments.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. 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 is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did not
have a material effect on the results of operations or financial position for
the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed and determinable. In addition, it provides criteria for when
an asset may be recognized for a portion or all of the assessment liability or
paid assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations. (Note 12)
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement No.
130 which 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 adopted
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement No. 130 for the first quarter of 1998, which resulted primarily in
reporting unrealized gains and losses on investments in debt and equity
securities in comprehensive income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
On December 3, 1998 Citizens Acquisition Corporation, a wholly owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 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 Company's consolidated results of operations include minority interest in
Citizens prior to December 3, 1998. The unaudited pro forma information below
presents consolidated results of operation as if the acquisition had occurred at
the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,405.1 $3,366.3
======== ========
Net realized capital gains included in revenue.............. $ 59.8 $ 71.8
======== ========
Income before taxes and minority interest................... 272.9 358.0
Income taxes................................................ (47.2) (91.3)
Minority Interest:
Equity in earnings...................................... (42.6) (64.1)
-------- --------
Net income.................................................. $ 183.1 $ 202.6
======== ========
</TABLE>
On October 29, 1998, the Company announced that had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the Company, in its Corporate Risk Management Services segment, has exited its
accident and health assumed reinsurance pool business, as well as its
administrative services only business. Additionally, it has commenced the
closing of nearly half of its nationwide Corporate Risk Management Services'
sales offices, eliminated certain staff and discontinued certain automation
initiatives. In addition to the aforementioned initiatives in the Corporate Risk
Management Services segment, the Property and Casualty segment is consolidating
its field support activities from fourteen regional branches into three hub
locations. As a result of the Company's restructuring initiative, it recognized
a pretax loss of $13.0 million, in the fourth quarter of 1998. Approximately
$5.5 million of this loss relates to severance and other employee related costs
resulting from the elimination of 339 positions, of which 129 employees had
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been terminated as of December 31, 1998. In addition, contract terminations and
lease cancellations resulted in losses of approximately $4.1 million and $3.4
million, respectively. During 1998, the Company made payments of approximately
$1.6 million related to this restructuring initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, of which $19.7 million relating to the Company's accident and health
assumed reinsurance pool business has been utilized as of December 31, 1998.
These pools consist primarily of the Corporate Risk Management Services
segment's assumed stop loss business, small group managed care pools, long-term
disability and long-term care pools, student accident and special risk business.
The agreement is consistent with management's decision to exit this line of
business, which the Company expects to run-off over the next three years. As a
result of this transaction, the Company recognized a $25.3 million pre-tax loss
in the third quarter of 1998.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on its results of operations or financial position.
In 1998 and 1997, Allmerica P&C redeemed 3,289.5 and 5,735.3 shares,
respectively, of its issued and outstanding common stock owned by AFC for $125.0
million and $195.0 million, respectively, thereby increasing FAFLIC's ownership
of Allmerica P&C by 4.3% and 6.3%, respectively. The 1998 transaction consisted
of $124.0 million of securities and $1.0 million of cash. The 1997 transaction
consisted of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C 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 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. 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.
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 funded a portion of the acquisition of
the 24.2 million publicly-held shares of Allmerica P&C pursuant to the merger on
July 16, 1997.
The Company's consolidated results of operations include minority interest in
Allmerica P&C prior to July 16, 1997. The unaudited pro forma information below
presents consolidated results of operations as if the merger and issuance of
Capital Securities had occurred at the beginning of 1996 and reflects
adjustments which include interest expense related to the assumed financing of a
portion of the cash consideration paid and amortization of goodwill.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the merger
and issuance of Capital Securities occurred at the beginning of 1996, nor is it
necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,362.7 $3,246.4
======== ========
Net realized capital gains included in revenue.............. $ 63.0 $ 46.7
======== ========
Income before taxes and minority interest................... 353.0 311.6
Income taxes................................................ (89.6) (68.7)
Minority Interest:
Equity in earnings...................................... (75.5) (67.3)
-------- --------
Net income.................................................. $ 187.9 $ 175.6
======== ========
</TABLE>
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions................. 2,408.9 83.0 5.2 2,486.7
Foreign governments............................... 107.9 7.7 4.5 111.1
Corporate fixed maturities........................ 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities........................ 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities............................ $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities................................. $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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
======== ====== ====== ========
</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,
1998, the amortized cost and market value of assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $105.4 million and $105.1 million were on
deposit with various state and governmental authorities at December 31, 1998 and
1997, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 384.7 $ 391.5
Due after one year through five years....................... 2,309.4 2,341.2
Due after five years through ten years...................... 2,173.3 2,199.6
Due after ten years......................................... 2,653.4 2,751.6
-------- --------
Total....................................................... $7,520.8 $7,683.9
======== ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------- --------------- -------- --------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 993.3 $18.2 $11.9
Equity securities........................................... $ 276.4 $76.3 $ 9.6
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
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year........................ $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens...................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest.................................................. 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year.............................. $ 79.0 $ 90.2 $169.2
====== ====== ======
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
====== ====== ======
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
(1) Includes net appreciation on other investments of $0.8 million, $1.8
million, and $0.6 million in 1998, 1997, and 1996, 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.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Mortgage loans.............................................. $562.3 $567.5
Real estate held for sale................................... 20.4 50.3
------ ------
Total mortgage loans and real estate........................ $582.7 $617.8
====== ======
</TABLE>
Reserves for mortgage loans were $11.5 million and $20.7 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there were 7 properties
remaining in the Company's portfolio, which are being actively marketed. As a
result of the plan, during 1997 real estate assets with a carrying amount of
$54.7 million were written down to the estimated fair value less cost of
disposal 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 1998 and 1997. During 1996,
non-cash investing activities included real estate acquired through foreclosure
of mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Property type:
Office building........................................... $304.4 $265.1
Residential............................................... 52.8 66.6
Retail.................................................... 108.5 132.8
Industrial/warehouse...................................... 110.0 107.2
Other..................................................... 18.5 66.8
Valuation allowances...................................... (11.5) (20.7)
------ ------
Total....................................................... $582.7 $617.8
====== ======
Geographic region:
South Atlantic............................................ $136.1 $173.4
Pacific................................................... 155.1 152.8
East North Central........................................ 80.5 102.0
Middle Atlantic........................................... 61.2 73.8
West South Central........................................ 54.7 34.9
New England............................................... 60.7 46.9
Other..................................................... 45.9 54.7
Valuation allowances...................................... (11.5) (20.7)
------ ------
Total....................................................... $582.7 $617.8
====== ======
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $84.7 million; 2000 -- $131.6 million; 2001 -- $33.9 million; 2002 -- $28.4
million; 2003 -- $42.5 million; and $241.2 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, 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 DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1998
Mortgage loans................................... $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
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
===== ===== ===== =====
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $20.9 million to the investment valuation allowance related to
real estate in 1997 primarily reflect write downs to the estimated fair value
less costs to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $22.0 million and $30.5 million, with
related reserves of $6.0 million and $13.8 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $26.1 million, $30.8 million
and $50.4 million, with related interest income while such loans were impaired
of $3.2 million, $3.2 million and $5.8 million as of December 31, 1998, 1997 and
1996, 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. Futures contract
activity increased significantly in 1998 due to the increase in sale of GICs.
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.
The notional amount of futures contracts outstanding at December 31, 1998 was
$92.7 million. There were no futures contracts outstanding at December 31, 1997.
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 maturity of all futures contracts
outstanding is less than one year. The fair value of futures contracts
outstanding was $92.5 million at December 31, 1998.
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. Deferred
hedging gains (losses) were $(1.8) million in 1998. There were no deferred
hedging gains or losses in 1997. Gains and losses on hedge contracts that are
deemed ineffective by the Company are realized immediately. There were
$0.1 million of gains realized on ineffective hedges in 1998. There was no gain
or loss in 1997 or 1996.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- --------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ -- $(33.0) $ 74.7
New contracts............................................... 1,117.5 (0.2) (1.1)
Contracts terminated........................................ (1,024.8) 33.2 (106.6)
--------- ------ -------
Contracts outstanding, end of year.......................... $ 92.7 $-- $ (33.0)
========= ====== =======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities. Interest
and principal related to foreign fixed income securities payable in foreign
currencies, at current exchange rates, are exchanged for the equivalent payment
in U.S dollars translated at a specific currency exchange rate. The primary risk
associated with these transactions is
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 nationally
recognized rating agencies. 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, as indicated by the fair value of the contract. The fair values
of the foreign currency swap contracts outstanding were $1.2 million and
$1.3 million at December 31, 1998 and 1997, respectively. Changes in the fair
value of contracts are reported as an unrealized gain or loss, consistent with
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 1998, 1997 and 1996. 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 gain or loss on foreign
currency swap contracts in 1998 or 1997.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $42.6 $ 47.6 $ 69.4
New contracts............................................... -- 5.0 --
Contracts expired........................................... -- (10.0) (21.8)
----- ------ ------
Contracts outstanding, end of year.......................... $42.6 $ 42.6 $ 47.6
===== ====== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at December
31, 1998 are $24.0 million in 1999, $8.3 million in 2000 and $10.3 million
thereafter. There are no expected maturities of such foreign currency swap
contracts in 2001, 2002 and 2003.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. 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. The use of interest rate swap contracts increased during 1998
due to the increase in floating rate GIC liabilities. 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 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, 1998 was a net
payable of $3.9 million. 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 $(2.8)
million, $(0.4) million and $0.6 million for the years ended December 31, 1998,
1997, and 1996, respectively. The fair value of interest rate swap contracts
outstanding were $(28.3) million and $(2.3) million at December 31, 1998 and
1997, respectively. 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
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged transaction. The Company had no deferred gain or loss on interest rate
swap contracts in 1998 or 1997. A reconciliation of the notional amount of
interest rate swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 244.1 $ 5.0 $ 17.5
New contracts............................................... 873.5 244.7 5.0
Contracts expired........................................... (5.0) (5.6) (17.5)
-------- ------ ------
Contracts outstanding, end of year.......................... $1,112.6 $244.1 $ 5.0
======== ====== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1998 is $44.0 million in 2000, $234.5 million in 2002, $810.5 million in 2003
and $23.6 million thereafter. There are no expected maturities of interest rate
contracts in 1999 or 2001.
G. OTHER SWAP CONTRACTS
The Company enters into security return-linked 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 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, 1998, was not material to the Company.
The Company does not require collateral or other security to support financial
instruments with credit risk.
In 1998, the Company also entered into credit default swap agreements. Under the
terms of these agreements, the Company assumes the default risk of a specific
high credit quality issuer in exchange for a stated annual premium. In the case
of default, the Company will pay the counterparty par value for a pre-determined
security of the issuer. The primary risk associated with these transactions is
the default risk of the underlying companies. The Company regularly assesses the
financial strength of the underlying companies and generally enters into default
swap agreements for companies rated "A" or better by nationally recognized
rating agencies.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.1) million at
December 31, 1998 and 1997. The net amount receivable or payable under
security-returned-linked and insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net increase (decrease)
in realized investment gains related to these contracts was $1.1 million in 1998
and $(1.6) million in 1997. There were no realized investment gains or losses on
other swap contracts recognized in 1996.
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.2 million in 1998. There was no
investment income recognized in 1997 and 1996.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 15.0 $ 58.6 $--
New contracts............................................... 266.3 192.1 58.6
Contracts expired........................................... (26.3) (211.6) --
Contracts terminated........................................ -- (24.1) --
------ ------- -----
Contracts outstanding, end of year.......................... $255.0 $ 15.0 $58.6
====== ======= =====
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1998 are
as follows: $115.0 million in 1999, $115.0 million in 2000 and $25.0 million in
2001. There are no expected maturities of such other swap contracts in 2002 or
2003.
H. OTHER
At December 31, 1998, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity. 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 $262.4 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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $530.8 $541.9 $553.8
Mortgage loans.............................................. 58.3 57.5 69.5
Equity securities........................................... 7.4 10.6 11.1
Policy loans................................................ 11.9 10.9 10.3
Real estate................................................. 7.2 20.1 40.8
Other long-term investments................................. (0.5) 12.4 19.9
Short-term investments...................................... 14.3 12.8 10.6
------ ------ ------
Gross investment income..................................... 629.4 666.2 716.0
Less investment expenses.................................... (15.7) (24.4) (45.2)
------ ------ ------
Net investment income....................................... $613.7 $641.8 $670.8
====== ====== ======
</TABLE>
At December 31, 1998, there was one mortgage loan on non-accrual status which
had an outstanding principal balance of $4.3 million. This loan was restructured
and fully impaired. There were no fixed maturities which were on non-accrual
status at December 31, 1998. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investments, had no impact in 1998 and 1997, and reduced net income by $0.5
million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $28.7 million, $40.3 million and $51.3 million at
December 31, 1998, 1997 and 1996, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $3.3 million, $3.9 million and $7.7 million in
1998, 1997 and 1996, respectively. Actual interest income on
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these loans included in net investment income aggregated $3.3 million,
$4.2 million and $4.5 million in 1998, 1997 and 1996, respectively.
There were no fixed maturities which were non-income producing for the year
ended December 31, 1998. There was one mortgage loan which was non-income
producing for the year ended December 31, 1998, which had an outstanding
principal balance of $4.3 million and was fully impaired.
Included in other long-term investments is a loss from limited partnerships of
$7.5 million in 1998, and income of $7.8 million and $13.7 million in 1997 and
1996, 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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $(11.8) $14.7 $(9.7)
Mortgage loans.............................................. 8.8 (1.2) (2.4)
Equity securities........................................... 66.6 53.6 54.8
Real estate................................................. 13.7 12.8 21.1
Other....................................................... (14.7) (3.4) 3.0
------ ----- -----
Net realized investment gains............................... $ 62.6 $76.5 $66.8
====== ===== =====
</TABLE>
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period, (net of
taxes and minority interest of $(20.8) million,
$123.7 million and $10.7 million in 1998, 1997 and 1996,
respectively).............................................. $ (6.8) $115.5 $ (0.7)
Less: reclassification adjustment for gains included in net
income (net of taxes and minority interest of
$21.5 million, $30.7 million and $24.2 million in 1998,
1997 and 1996, respectively)............................... 33.3 37.6 20.9
------ ------ ------
Other comprehensive income.................................. $(40.1) $ 77.9 $(21.6)
====== ====== ======
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $(27.1) million at December 31,
1998. Fair values of interest rate futures were not material at December 31,
1997.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
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.
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-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents....................... $ 504.0 $ 504.0 $ 213.9 $ 213.9
Fixed maturities................................ 7,683.9 7,683.9 7,253.5 7,253.5
Equity securities............................... 397.1 397.1 479.0 479.0
Mortgage loans.................................. 562.3 587.1 567.5 597.0
Policy loans.................................... 154.3 154.3 141.9 141.9
-------- -------- -------- --------
$9,301.6 $9,326.4 $8,655.8 $8,685.3
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts................. $1,791.8 $1,830.8 $ 985.2 $1,004.7
Supplemental contracts without life
contingencies................................. 37.3 37.3 22.4 22.4
Dividend accumulations.......................... 88.4 88.4 87.8 87.8
Other individual contract deposit funds......... 61.6 61.1 57.9 55.7
Other group contract deposit funds.............. 700.4 704.0 714.8 715.5
Individual annuity contracts.................... 1,110.6 1,073.6 907.4 882.2
Short-term debt................................. 221.3 221.3 33.0 33.0
Long-term debt.................................. -- -- 2.6 2.6
-------- -------- -------- --------
$4,011.4 $4,016.5 $2,811.1 $2,803.9
======== ======== ======== ========
</TABLE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1998, 1997
and 1996 is a net pre-tax contribution from the Closed Block of $10.4 million,
$9.1 million and $8.6 million, respectively. Summarized financial information of
the Closed Block as of December 31, 1998 and 1997 and for the period ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $399.1
and $400.1, respectively)............................... $414.2 $412.9
Mortgage loans............................................ 136.0 112.0
Policy loans.............................................. 210.9 218.8
Cash and cash equivalents................................. 9.4 25.1
Accrued investment income................................. 14.1 14.1
Deferred policy acquisition costs......................... 15.6 18.2
Other assets.............................................. 2.9 5.6
------ ------
Total assets................................................ $803.1 $806.7
====== ======
Liabilities
Policy liabilities and accruals........................... $862.9 $875.1
Other liabilities......................................... 9.1 10.4
------ ------
Total liabilities........................................... $872.0 $885.5
====== ======
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Revenues
Premiums................................................ $ 55.4 $ 58.3 $ 61.7
Net investment income................................... 53.3 53.4 52.6
Realized investment loss................................ 0.1 1.3 (0.7)
------- ------- -------
Total revenues.............................................. 108.8 113.0 113.6
Benefits and expenses
Policy benefits......................................... 95.0 100.5 101.2
Policy acquisition expenses............................. 2.7 3.0 3.2
Other operating expenses................................ 0.7 0.4 0.6
------- ------- -------
Total benefits and expenses................................. 98.4 103.9 105.0
------- ------- -------
Contribution from the Closed Block.......................... $ 10.4 $ 9.1 $ 8.6
======= ======= =======
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block...................... $ 10.4 $ 9.1 $ 8.6
Change in deferred policy acquisition costs, net........ 2.6 2.9 3.4
Change in premiums and other receivables................ 0.3 -- 0.2
Change in policy liabilities and accruals............... (13.5) (11.6) (13.9)
Change in accrued investment income..................... -- 0.2 2.3
Deferred Taxes.......................................... 0.1 (5.1) 1.0
Change in other assets.................................. 2.4 (2.9) (1.6)
Change in expenses and taxes payable.................... (2.9) (2.0) 1.7
Other, net.............................................. (0.1) (1.2) 1.4
------- ------- -------
Net cash (used in) provided by operating activities....... (0.7) (10.6) 3.1
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 83.6 161.6 188.1
Purchases of investments................................ (106.5) (161.4) (196.9)
Other, net.............................................. 7.9 11.4 12.2
------- ------- -------
Net cash provided by (used in) investing activities....... (15.0) 11.6 3.4
------- ------- -------
Net increase in cash and cash equivalents................... (15.7) 1.0 6.5
Cash and cash equivalents, beginning of year................ 25.1 24.1 17.6
------- ------- -------
Cash and cash equivalents, end of year...................... $ 9.4 $ 25.1 $ 24.1
======= ======= =======
</TABLE>
There are no valuation allowances on mortgage loans in the Closed Block at
December 31, 1998, 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-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Short and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Short-Term
Commercial paper........................................ $ 41.3 $32.6
Borrowings under bank credit facility................... 150.0 --
Repurchase agreements................................... 30.0 --
Other................................................... -- 0.4
------ -----
Total short-term debt....................................... $221.3 $33.0
====== =====
Long-term debt.............................................. $ -- $ 2.6
====== =====
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1998, the weighted average
interest rate for outstanding commercial paper was approximately 5.34%.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million.
During 1998 and 1996, the Company utilized repurchase agreements to finance
certain investments. The 1996 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 $7.3 million, $3.6 million and $16.8 million in 1998,
1997 and 1996, respectively. Interest paid on the credit agreement was
approximately $0.7 million in 1998 and $2.8 million in 1997. 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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................. $ 67.6 $83.3 $ 96.8
Deferred................................................ (15.4) 14.2 (15.7)
------ ----- ------
Total....................................................... $ 52.2 $97.5 $ 81.1
====== ===== ======
</TABLE>
F-27
<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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Expected federal income tax expense......................... $100.9 $131.8 $122.3
Tax-exempt interest..................................... (38.9) (37.9) (35.3)
Differential earnings amount............................ -- -- (10.2)
Dividend received deduction............................. (5.1) (3.2) (1.6)
Changes in tax reserve estimates........................ 2.3 7.8 4.7
Tax credits............................................. (8.5) (2.7)
Other, net.............................................. 1.5 1.7 1.2
------ ------ ------
Federal income tax expense.................................. $ 52.2 $ 97.5 $ 81.1
====== ====== ======
</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 (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards....................................... $ (16.8) $ (15.6)
Loss reserve discounting................................ (406.6) (391.6)
Deferred acquisition costs.............................. 345.8 291.8
Employee benefit plans.................................. (45.3) (48.0)
Investments, net........................................ 121.7 175.4
Bad debt reserve........................................ (1.8) (14.3)
Litigation reserve...................................... (10.9) --
Other, net.............................................. (5.5) 15.2
------- -------
Deferred tax (asset) liability, net......................... $ (19.4) $ 12.9
======= =======
</TABLE>
Gross deferred income tax assets totaled $486.9 million and $469.5 million at
December 31, 1998 and 1997, respectively. Gross deferred income tax liabilities
totaled $467.5 million and $482.4 million at December 31, 1998 and 1997,
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, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1998, there are available alternative
minimum tax credit carryforwards of $16.8 million.
F-28
<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 1994. 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 1992,1993 and 1994 for the
FAFLIC/AFLIAC consolidated group. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/ AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
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
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby 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 1998, 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 periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.0 $ 19.9 $ 19.0
Interest cost............................................... 25.5 23.5 21.9
Expected return on plan assets.............................. (34.9) (31.2) (28.3)
Recognized net actuarial loss (gain)........................ 0.4 0.1 (0.4)
Amortization of transition asset............................ (1.8) (1.9) (1.9)
Amortization of prior service cost.......................... (1.7) (2.0) (2.3)
------ ------ ------
Net periodic pension cost................................... $ 6.5 $ 8.4 $ 8.0
====== ====== ======
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the status of the pension plan. At December 31,
1998 and 1997 the plan's assets exceeded its projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year....... $370.4 $344.2
Service cost -- benefits earned during the year......... 19.0 19.9
Interest cost........................................... 25.5 23.5
Actuarial losses........................................ 20.4 0.3
Benefits paid........................................... (21.1) (17.5)
------ ------
Projected benefit obligation at end of year............. $414.2 $370.4
====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.......... $395.5 $347.8
Actual return on plan assets............................ 67.2 65.2
Benefits paid........................................... (21.1) (17.5)
------ ------
Fair value of plan assets at end of year................ 441.6 395.5
------ ------
Funded status of the plan............................... 27.4 25.1
Unrecognized transition obligation...................... (23.9) (26.2)
Unamortized prior service cost.......................... (11.0) (13.9)
Unrecognized net actuarial gains........................ (54.9) (44.9)
------ ------
Net pension liability............................... $(62.4) $(59.9)
====== ======
</TABLE>
As a result of AFC's merger with APY, certain pension liabilities were reduced
by $11.7 million in 1997, to reflect their fair value as of the purchase date.
These pension liabilities were reduced by $10.3 million in 1998, which reflects
fair value, net of applicable amortization. Determination of the projected
benefit obligations was based on a weighted average discount rate of 6.5% and
7.0% in 1998 and 1997, respectively, and the assumed long-term rate of return on
plan assets was 9.0% in both 1998 and 1997. 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. Plan
assets also include 973,262 shares of AFC Common Stock at both December 31, 1998
and 1997, with a market value of $56.3 million and $48.6 million at
December 31, 1998 and 1997, respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1998, 1997 and
1996, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expenses related to this plan was $5.6 million, $3.3
million and $5.5 million, in 1998, 1997 and 1996, respectively. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The Plan expense in 1998, 1997 and 1996 was $3.0 million, $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 merger of benefit plans resulted in a $5.9 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
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) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at
beginning of year..................................... $ 71.8 $ 72.3
Service cost............................................ 3.1 3.0
Interest cost........................................... 5.1 4.6
Actuarial losses........................................ 7.6 (4.7)
Benefits paid........................................... (3.6) (3.4)
------ ------
Accumulated postretirement benefit obligation at end of
year.................................................. 84.0 71.8
Fair value of plan assets at end of year................ -- --
------ ------
Funded status of the plan............................... (84.0) (71.8)
Unamortized prior service cost.......................... (12.9) (15.3)
Unrecognized net actuarial losses....................... 7.5 0.8
------ ------
Accumulated postretirement benefit costs................ $(89.4) $(86.3)
====== ======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 3.1 $ 3.0 $ 3.2
Interest cost............................................... 5.1 4.6 4.6
Recognized net actuarial loss (gain)........................ 0.1 (0.1) 0.2
Amortization of prior service cost.......................... (2.4) (2.7) (3.0)
----- ----- -----
Net periodic postretirement benefit cost.................... $ 5.9 $ 4.8 $ 5.0
===== ===== =====
</TABLE>
As a result of AFC's merger with APY in 1997, certain postretirement liabilities
were reduced by $6.1 million to reflect their fair value as of the purchase
date. These postretirement liabilities were reduced by $5.4 million in 1998,
which reflects fair value, net of applicable amortization.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1998, health care costs were assumed to increase 7.0% in 1999,
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, 1998
by $5.7 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1998 by $0.7 million.
Conversely, decreasing the assumed health care cost trend rates by one
percentage point in each year would decrease the accumulated postretirement
benefit obligation at December 31, 1998 by $5.2 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1998 by $0.6 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% and 7.0% at December 31, 1998 and
1997. In addition, the actuarial present value of the accumulated postretirement
benefit obligation was determined using an assumed rate of increase in future
compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the aforementioned postretirement
medical and death benefits plans were merged with the existing benefit plans of
FAFLIC. The merger of benefit plans resulted in a $3.8 million change of
interest adjustment to additional paid in capital during 1998. The change of
interest adjustment arose from FAFLIC's forgiveness of certain Allmerica P&C
benefit plan liabilities attributable to Allmerica P&C's minority interest.
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 Allmerica P&C (Hanover) are the primary source of cash
flow for AFC.
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. During 1998, FAFLIC paid dividends of
$50.0 million to AFC. No dividends were declared by FAFLIC to AFC during 1997 or
1996 During 1999, FAFLIC could pay dividends of $116.4 million to AFC without
prior approval of the Commissioner.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. No dividends were declared by AFLIAC to FAFLIC during
1998, 1997 or 1996. During 1999, AFLIAC could pay dividends of $26.1 million to
FAFLIC without prior approval.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, $125.0 million, $120.0
million and $105.0 million during 1998, 1997 and 1996, respectively. During
1999, the maximum dividend and other distributions that could be paid to
Allmerica P&C by Hanover, without prior approval of the Insurance Commissioner,
is approximately $1.6 million, which considers an extraordinary dividend of
$125.0 million declared on March 12, 1998. The allowable dividend without prior
approval will increase to $126.6 million on March 12, 1999.
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 $200.0 million and $6.3 million during 1998 and 1996, respectively. A
$180.0 million extraordinary dividend was approved by the Commissioner in 1998.
No dividends were declared by Citizens Insurance during 1997. During 1999,
Citizens Insurance can declare no dividends to Citizens Corporation without
prior approval of the Michigan Insurance Commissioner as a result of the $180.0
million extraordinary dividend declared on December 21, 1998.
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 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 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
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management
Property and Casualty................................... $2,204.8 $2,211.0 $2,145.8
Corporate Risk Management Services...................... 412.9 405.4 370.7
-------- -------- --------
Subtotal............................................ 2,617.7 2,616.4 2,516.5
-------- -------- --------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 721.2 709.7 700.0
Allmerica Asset Management.............................. 121.7 91.1 110.5
-------- -------- --------
Subtotal............................................ 842.9 800.8 810.5
-------- -------- --------
Corporate................................................. 2.3 5.5 5.2
Intersegment revenues..................................... (7.6) (11.6) (13.8)
-------- -------- --------
Total segment revenues including Closed Block........... 3,455.2 3,411.1 3,318.4
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block............................. (98.4) (102.6) (105.7)
Net realized gains...................................... 62.6 75.6 66.8
-------- -------- --------
Total revenues...................................... $3,419.4 $3,384.2 $3,279.5
======== ======== ========
</TABLE>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment income (loss) before income taxes and minority
interest:
Risk Management
Property and Casualty................................... $151.4 $172.9 $170.7
Corporate Risk Management Services...................... 7.8 27.0 28.3
------ ------ ------
Subtotal............................................ 159.2 199.9 199.0
------ ------ ------
Retirement and Asset Accumulation
Allmerica Financial Services............................ 166.6 134.6 106.8
Allmerica Asset Management.............................. 23.7 18.4 11.5
------ ------ ------
Subtotal............................................ 190.3 153.0 118.3
------ ------ ------
Corporate................................................. (45.3) (44.6) (36.6)
------ ------ ------
Segment income before income taxes and minority
interest.............................................. 304.2 308.3 280.7
------ ------ ------
Adjustments to segment income:
Net realized investment gains, net of amortization...... 53.9 78.7 69.6
Sales practice litigation expense....................... (31.0) -- --
Loss on exiting reinsurance pools....................... (25.3)
Gain from change in mortality assumptions............... -- 47.0 --
Loss on cession of disability income business........... -- (53.9) --
Restructuring costs..................................... (13.0) -- --
Other items............................................. (.7) (3.2) (1.1)
------ ------ ------
Income before taxes and minority interest................. $288.1 $376.9 $349.2
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997 1998 1997
- ------------- --------- --------- --------- ---------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION
COSTS
<S> <C> <C> <C> <C>
Risk Management
Property and Casualty......................... $ 5,649.0 $ 5,650.4 $ 164.9 $167.2
Corporate Risk Management Services............ 567.8 619.8 2.6 2.9
--------- --------- -------- ------
Subtotal.................................. 6,216.8 6,270.2 167.5 170.1
Retirement and Asset Accumulation
Allmerica Financial Services.................. 19,407.3 15,159.2 993.1 794.5
Allmerica Asset Management.................... 1,810.9 1,035.1 0.6 0.9
--------- --------- -------- ------
Subtotal.................................. 21,218.2 16,194.3 993.7 795.4
Corporate..................................... 29.6 26.9 -- --
--------- --------- -------- ------
Total..................................... $27,464.6 $22,491.4 $1,161.2 $965.5
========= ========= ======== ======
</TABLE>
13. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $34.9 million, $33.6 million and $34.9 million in 1998, 1997 and
1996, respectively. At December 31, 1998, future minimum rental payments under
non-cancelable operating leases were approximately $73.5 million, payable as
follows: 1999 -- $28.6 million; 2000 -- $21.0 million; 2001 -- $13.8 million;
2002 -- $6.9 million; and $3.2 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 1999.
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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, 1998, 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 1998, 1997 and 1996 were
$34.3 million and $38.1 million, $32.3 million and $28.2 million, and $38.0
million and $21.8 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1998, 1997 and 1996 of $3.7
million and $18.0 million, $9.8 million and $(0.8) million, and $50.5 million
and $(52.9) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
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.
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................. $ 416.6 $ 417.4 $ 389.1
Assumed................................................. 111.9 110.7 87.8
Ceded................................................... (189.8) (170.1) (138.9)
-------- -------- --------
Net premiums................................................ $ 338.7 $ 358.0 $ 338.0
======== ======== ========
Property and casualty premiums written:
Direct.................................................. $1,969.3 $2,068.5 $2,039.7
Assumed................................................. 58.8 103.1 108.7
Ceded................................................... (74.1) (179.8) (234.0)
-------- -------- --------
Net premiums................................................ $1,954.0 $1,991.8 $1,914.4
======== ======== ========
Property and casualty premiums earned:
Direct.................................................. $1,966.8 $2,046.2 $2,018.5
Assumed................................................. 64.5 102.0 112.4
Ceded................................................... (66.1) (195.1) (232.6)
-------- -------- --------
Net premiums................................................ $1,965.2 $1,953.1 $1,898.3
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................. $ 653.6 $ 656.4 $ 606.5
Assumed................................................. 67.9 61.6 44.9
Ceded................................................... (164.0) (158.8) (77.8)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $ 557.5 $ 559.2 $ 573.6
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................. $1,588.3 $1,464.9 $1,299.8
Assumed................................................. 62.7 101.2 85.8
Ceded................................................... (158.2) (120.6) (2.2)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses................................................... $1,492.8 $1,445.5 $1,383.4
======== ======== ========
</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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 965.5 $ 822.7 $ 735.7
Acquisition expenses deferred........................... 641.2 617.7 547.4
Amortized to expense during the year.................... (452.8) (476.0) (470.1)
Adjustment to equity during the year.................... 7.3 (11.1) 9.7
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...................................... $1,161.2 $ 965.5 $ 822.7
======== ======= =======
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$568.0 million, $533.6 million and $471.7 million at December 31, 1998, 1997 and
1996, respectively. Accident and health claim liabilities were re-estimated for
all prior years and were increased by $14.6 million in 1998, and decreased by
$0.2 million and $0.6 million in 1997 and 1996, respectively. The increase in
1998 resulted from the Company's reserve strengthening primarily in the assumed
reinsurance and stop loss only business.
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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,615.4 $2,744.1 $2,896.0
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year........ 1,609.0 1,564.1 1,513.3
Decrease in provision for insured events of prior
years................................................. (127.2) (127.9) (141.4)
-------- -------- --------
Total incurred losses and LAE............................... 1,481.8 1,436.2 1,371.9
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................. 871.9 775.1 759.6
Losses and LAE attributable to insured events of prior
years................................................. 643.0 732.1 627.6
-------- -------- --------
Total payments.............................................. 1,514.9 1,507.2 1,387.2
-------- -------- --------
Change in reinsurance recoverable on unpaid losses.......... 15.0 (50.2) (136.6)
-------- -------- --------
Other (1)................................................... -- (7.5) --
-------- -------- --------
Reserve for losses and LAE, end of year..................... $2,597.3 $2,615.4 $2,744.1
======== ======== ========
</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 $127.2 million,
$127.9 million and $141.1 million in 1998, 1997, and 1996, respectively.
The decrease in favorable development on prior years' reserves of $0.7 million
in 1998 results from a $20.7 million decrease in favorable development at
Citizens, significantly offset by a $20.0 million increase in favorable
development at Hanover. The decrease in favorable development on prior year
reserves at Citizens in 1998, reflects a $13.8 million decrease in favorable
development, to $21.9 million, in the workers' compensation line. In addition,
favorable development in the commercial multiple peril line decreased $4.0
million, to
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$0.3 million. These declines in favorable development are partially offset by
continued favorable development on prior year reserves in the personal
automobile line due to tort reform in Michigan, which became effective July 26,
1996. The new legislation requires judges rather than juries to determine if the
minimum threshold to allow pain and suffering damage settlements has been met.
The increase in favorable development at Hanover during 1998 reflects a $20.6
million increase in favorable development on prior year reserves, to $38.0
million, in the personal automobile line, as well as a $14.9 million increase to
$12.1 million in the commercial multiple peril line. These increases are
primarily attributable to the initiatives taken by the Company over the past two
years which are expected to reduce ultimate settlement costs. These increases
are partially offset by less favorable development in the workers' compensation
line where favorable development on prior year reserves decreased
$19.2 million, to $9.6 million.
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. These increases are
partially offset by less favorable development in the personal automobile line,
where favorable development decreased $10.5 million, to $22.5 million in 1997.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
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 $49.9
million, $53.1 million and $50.8 million, net of reinsurance of $14.2 million,
$15.7 million and $20.2 million in 1998, 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. 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 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 70.0%,
65.8% and 59.5% of the outstanding shares of common stock at December 31, 1998,
1997 and 1996, respectively. Earnings and
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholder's equity attributable to minority shareholders are included in
minority interest in the consolidated financial statements.
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 on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, 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, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement, to which the court granted preliminary
approval on December 4, 1998. A hearing was held on March 19, 1999 to consider
final approval of the settlement agreement. A decision by the court is expected
to be rendered in the near future. Accordingly, FAFLIC recognized a
$31.0 million pre-tax expense during the third quarter of 1998 related to this
litigation. Although the Company believes that this expense reflects appropriate
recognition of its obligation under the settlement, this estimate assumes the
availability of insurance coverage for certain claims, and the estimate may be
revised based on the amount of reimbursement actually tendered by AFC's
insurance carriers, if any, and based on changes in the Company's estimate of
the ultimate cost of the benefits to be provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However, liabilities related to these proceedings could be established in the
near term if estimates of the ultimate resolution of these proceedings are
revised.
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 miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies......................... $ 180.7 $ 190.3 $ 155.5
Life and Health Companies............................... 86.4 191.2 133.3
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies......................... $1,269.3 $1,279.6 $1,201.6
Life and Health Companies............................... 1,164.1 1,221.3 1,120.1
</TABLE>
20. SUBSEQUENT EVENT
On April 1, 1999, Allmerica P&C redeemed an additional 3,246.8 shares of its
issued and outstanding common stock owned by AFC for $125.0 million, thereby
increasing FAFLIC's ownership of Allmerica P&C by 4.8%. The 1999 transaction
consisted of $75.4 million of securities and $49.6 million of cash.
21. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
During the second quarter of 1999, AFC approved a plan to exit its group life
and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of FAFLIC's group life and health insurance business, including its
reinsurance pool business, have been reported in the Consolidated Statements of
Income as discontinued operations in the second quarter of 1999 in accordance
with Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
No. 30"). In the third quarter of 1999, the operating results from the
discontinued business were adjusted to reflect the recording of additional
reserves related to prior years. At December 31, 1998, the businesses had assets
of approximately $480.9 million consisting primarily of invested assets,
premiums and fees receivable, and reinsurance recoverables, and liabilities of
approximately $445.3 million consisting primarily of policy liabilities.
Revenues for the discontinued operations were $398.5 million, $389.2 million,
and $356.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Net (loss) income for the discontinued operations was ($13.3)
million, $16.6 million, and $17.0 million for the years ended December 31, 1998,
1997 and 1996, respectively. On October 6, 1999, AFC announced that it reached
an agreement which provides for the sale of the Company's EBS business effective
F-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 1, 2000. As a result of this transaction, the Company recorded a
$30.5 million loss, net of taxes, on the disposal of its group life and health
business.
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica P&C, as
well as several non-insurance subsidiaries, from FAFLIC to AFC. FAFLIC has
retained its ownership of AFLIAC and certain other subsidiaries. Under an
agreement with the Commonwealth of Massachusetts Insurance Commissioner ("the
Commissioner"), AFC has contributed to FAFLIC capital of $125.0 million and
agreed to maintain FAFLIC's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 would require the prior approval of the Commissioner. This transaction
was approved by the Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which is included in FAFLIC's net
income, to be transferred from FAFLIC to AFC pursuant to the aforementioned
change in corporate structure was $95.7 million. As of December 31, 1998, the
total assets and total shareholders' equity of these subsidiaries were $4,033.0
million and $1,264.1 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 18, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
Prior to the aforementioned change in AFC's corporate structure, on May 5, 1999
and May 11, 1999, Allmerica P&C redeemed 1,273.9 shares and 4,142.0 shares of
its issued and outstanding common stock owned by AFC for $50.0 million and
$175.0 million, respectively. The May 5, 1999 and May 11, 1999 transactions
consisted of cash and short-term securities. After the May 11, 1999 transaction,
FAFLIC's ownership of Allmerica P&C increased to 84.52%.
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Policyowners of the Group VEL Account of First Allmerica Financial Life
Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Group VEL Account of First Allmerica Financial Life Insurance
Company at December 31, 1998, the results of each of their operations and the
changes in each of their net assets for each of the three 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 securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
INVESTMENT MONEY EQUITY GOVERNMENT
GROWTH GRADE INCOME MARKET INDEX BOND
--------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $ 429 $ 271 $ 242 $ 503 $ 258
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.......................... -- -- -- -- --
--------- ------------ --------- --------- ----------
Total assets.............................. 429 271 242 503 258
LIABILITIES: -- -- -- -- --
--------- ------------ --------- --------- ----------
Net assets................................ $ 429 $ 271 $ 242 $ 503 $ 258
--------- ------------ --------- --------- ----------
--------- ------------ --------- --------- ----------
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ -- $ -- $ --
Value of investment by First Allmerica
Financial Life Insurance Company
(Sponsor)............................... 429 271 242 503 258
--------- ------------ --------- --------- ----------
$ 429 $ 271 $ 242 $ 503 $ 258
--------- ------------ --------- --------- ----------
--------- ------------ --------- --------- ----------
Units outstanding, December 31, 1998........ 200 200 200 200 200
Net asset value per unit, December 31,
1998....................................... $2.145962 $1.356605 $1.210004 $2.516518 $1.290007
<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........................... $ 388 $ 523 $ 418 $ 372 $ 336
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.......................... -- -- -- -- --
---------- --------- ------------ ----------- -------------
Total assets.............................. 388 523 418 372 336
LIABILITIES: -- -- -- -- --
---------- --------- ------------ ----------- -------------
Net assets................................ $ 388 $ 523 $ 418 $ 372 $ 336
---------- --------- ------------ ----------- -------------
---------- --------- ------------ ----------- -------------
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ -- $ -- $ --
Value of investment by First Allmerica
Financial Life Insurance Company
(Sponsor)............................... 388 523 418 372 336
---------- --------- ------------ ----------- -------------
$ 388 $ 523 $ 418 $ 372 $ 336
---------- --------- ------------ ----------- -------------
---------- --------- ------------ ----------- -------------
Units outstanding, December 31, 1998........ 200 200 200 200 200
Net asset value per unit, December 31,
1998....................................... $1.938832 $2.612654 $2.087608 $1.861037 $1.680427
</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, 1998
<TABLE>
<CAPTION>
FIDELITY
SELECT SELECT SELECT VIP FIDELITY
CAPITAL EMERGING STRATEGIC HIGH VIP
APPRECIATION MARKETS(a) GROWTH(a) INCOME EQUITY-INCOME
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $ 394 $ -- $ -- $ -- $ --
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)......... -- -- -- 284 393
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total assets................ 394 -- -- 284 393
LIABILITIES: -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net assets.................. $ 394 $ -- $ -- $ 284 $ 393
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net asset distribution by
category:
Variable life policies...... $ -- $ -- $ -- $ -- $ --
Value of investment by First
Allmerica Financial Life
Insurance Company
(Sponsor)................. 394 -- -- 284 393
---------- ---------- ---------- ---------- ----------
$ 394 $ -- $ -- $ 284 $ 393
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Units outstanding, December
31, 1998..................... 200 -- -- 200 200
Net asset value per unit,
December 31, 1998............ $1.972109 $1.000000 $1.000000 $1.420445 $1.964372
<CAPTION>
FIDELITY T. ROWE
FIDELITY FIDELITY VIP II PRICE DGPF
VIP VIP ASSET INTERNATIONAL INTERNATIONAL
GROWTH OVERSEAS MANAGER STOCK(a) EQUITY
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Allmerica Investment Trust... $ -- $ -- $ -- $ -- $ --
Investments in shares of
Fidelity Variable Insurance
Products Funds (VIP)......... 492 306 358 -- --
Investment in shares of T.
Rowe Price International
Series, Inc.................. -- -- -- -- --
Investment in shares of
Delaware Group Premium Fund,
Inc.......................... -- -- -- -- 307
---------- ---------- ---------- ---------- ----------
Total assets................ 492 306 358 -- 307
LIABILITIES: -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net assets.................. $ 492 $ 306 $ 358 $ -- $ 307
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net asset distribution by
category:
Variable life policies...... $ -- $ -- $ -- $ -- $ --
Value of investment by First
Allmerica Financial Life
Insurance Company
(Sponsor)................. 492 306 358 -- 307
---------- ---------- ---------- ---------- ----------
$ 492 $ 306 $ 358 $ -- $ 307
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Units outstanding, December
31, 1998..................... 200 200 200 -- 200
Net asset value per unit,
December 31, 1998............ $2.461978 $1.530786 $1.789209 $1.000000 $1.535924
</TABLE>
(a) For the period ended 12/31/98, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET
------------------- ------------------- -------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 31, 31,
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ 4 $ 6 $ 5 $ 15 $ 15 $ 14 $ 12 $ 12 $ 11
----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income
(loss).................. 4 6 5 15 15 14 12 12 11
----- ----- ----- ----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 4 58 26 -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net realized gain (loss).... 4 58 26 -- -- -- -- -- --
Net unrealized gain
(loss).................... 61 9 17 5 6 (6) -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 65 67 43 5 6 (6) -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 69 73 48 20 21 8 12 12 11
----- ----- ----- ----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets................ 69 73 48 20 21 8 12 12 11
NET ASSETS:
Beginning of year........... 360 287 239 251 230 222 230 218 207
----- ----- ----- ----- ----- ----- ----- ----- -----
End of year................. $ 429 $ 360 $ 287 $ 271 $ 251 $ 230 $ 242 $ 230 $ 218
----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
EQUITY INDEX GOVERNMENT BOND
----------------------- -----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ 5 $ 4 $ 5 $ 14 $ 13 $ 13
----- ----- ----- ----- ----- -----
Net investment income
(loss).................. 5 4 5 14 13 13
----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 12 11 4 -- -- --
----- ----- ----- ----- ----- -----
Net realized gain (loss).... 12 11 4 -- -- --
Net unrealized gain
(loss).................... 94 81 45 4 3 (5)
----- ----- ----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 106 92 49 4 3 (5)
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 111 96 54 18 16 8
----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets................ 111 96 54 18 16 8
NET ASSETS:
Beginning of year........... 392 296 242 240 224 216
----- ----- ----- ----- ----- -----
End of year................. $ 503 $ 392 $ 296 $ 258 $ 240 $ 224
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT SELECT
AGGRESSIVE GROWTH SELECT GROWTH GROWTH AND INCOME
------------------- ------------------- -------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 31, 31,
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ -- $ -- $ -- $ 1 $ 1 $ 5 $ 4 $ 4
----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income
(loss).................. -- -- -- -- 1 1 5 4 4
----- ----- ----- ----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... -- 29 21 4 20 40 1 31 21
----- ----- ----- ----- ----- ----- ----- ----- -----
Net realized gain (loss).... -- 29 21 4 20 40 1 31 21
Net unrealized gain
(loss).................... 37 27 25 133 77 11 53 31 26
----- ----- ----- ----- ----- ----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 37 56 46 137 97 51 54 62 47
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 37 56 46 137 98 52 59 66 51
----- ----- ----- ----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets................ 37 56 46 137 98 52 59 66 51
NET ASSETS:
Beginning of year........... 351 295 249 386 288 236 359 293 242
----- ----- ----- ----- ----- ----- ----- ----- -----
End of year................. $ 388 $ 351 $ 295 $ 523 $ 386 $ 288 $ 418 $ 359 $ 293
----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
SELECT SELECT
VALUE OPPORTUNITY* INTERNATIONAL EQUITY
----------------------- -----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ 3 $ 2 $ 2 $ 4 $ 7 $ 5
----- ----- ----- ----- ----- -----
Net investment income
(loss).................. 3 2 2 4 7 5
----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 1 47 12 -- 9 1
----- ----- ----- ----- ----- -----
Net realized gain (loss).... 1 47 12 -- 9 1
Net unrealized gain
(loss).................... 13 22 49 43 (3) 44
----- ----- ----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 14 69 61 43 6 45
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 17 71 63 47 13 50
----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets................ 17 71 63 47 13 50
NET ASSETS:
Beginning of year........... 355 284 221 289 276 226
----- ----- ----- ----- ----- -----
End of year................. $ 372 $ 355 $ 284 $ 336 $ 289 $ 276
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT
CAPITAL FIDELITY VIP FIDELITY VIP
APPRECIATION HIGH INCOME EQUITY-INCOME
------------------- ------------------- -------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 31, 31,
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ -- $ -- $ -- $ 21 $ 18 $ 17 $ 5 $ 4 $ --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income
(loss).................. -- -- -- 21 18 17 5 4 --
----- ----- ----- ----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 60 -- 1 13 2 3 18 24 11
----- ----- ----- ----- ----- ----- ----- ----- -----
Net realized gain (loss).... 60 -- 1 13 2 3 18 24 11
Net unrealized gain
(loss).................... (12) 43 23 (47) 25 11 18 49 23
----- ----- ----- ----- ----- ----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 48 43 24 (34) 27 14 36 73 34
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 48 43 24 (13) 45 31 41 77 34
----- ----- ----- ----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. -- -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets................ 48 43 24 (13) 45 31 41 77 34
NET ASSETS:
Beginning of year........... 346 303 279 297 252 221 352 275 241
----- ----- ----- ----- ----- ----- ----- ----- -----
End of year................. $ 394 $ 346 $ 303 $ 284 $ 297 $ 252 $ 393 $ 352 $ 275
----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
FIDELITY VIP FIDELITY VIP
GROWTH OVERSEAS
--------------------- ---------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 31,
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends................... $ 2 $ 1 $ 1 $ 5 $ 5 $ 2
----- ----- ----- ----- ----- -----
Net investment income
(loss).................. 2 1 1 5 5 2
----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors... 47 9 17 16 17 3
----- ----- ----- ----- ----- -----
Net realized gain (loss).... 47 9 17 16 17 3
Net unrealized gain
(loss).................... 90 57 19 13 7 23
----- ----- ----- ----- ----- -----
Net realized and
unrealized gain
(loss).................. 137 66 36 29 24 26
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from
operations................ 139 67 37 34 29 28
----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets from policy
transactions.............. -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Net increase (decrease) in
net assets................ 139 67 37 34 29 28
NET ASSETS:
Beginning of year........... 353 286 249 272 243 215
----- ----- ----- ----- ----- -----
End of year................. $ 492 $ 353 $ 286 $ 306 $ 272 $ 243
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP II DGPF
ASSET MANAGER INTERNATIONAL EQUITY
--------------------- ---------------------
YEAR ENDED DECEMBER YEAR ENDED DECEMBER
31, 31,
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 10 $ 8 $ 8 $ 11 $ 9 $ 7
-
----- ----- ----- ----- ----- -----
Net investment income (loss)............. 10 8 8 11 9 7
-
----- ----- ----- ----- ----- -----
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 30 23 7 -- -- 2
-
----- ----- ----- ----- ----- -----
Net realized gain (loss)................... 30 23 7 -- -- 2
Net unrealized gain (loss)................. 7 22 18 18 8 35
-
----- ----- ----- ----- ----- -----
Net realized and unrealized gain
(loss)................................. 37 45 25 18 8 37
-
----- ----- ----- ----- ----- -----
Net increase (decrease) in net assets from
operations............................... 47 53 33 29 17 44
-
----- ----- ----- ----- ----- -----
POLICY TRANSACTIONS: -- -- -- -- -- --
-
----- ----- ----- ----- ----- -----
Net increase (decrease) in net assets from
policy transactions...................... -- -- -- -- -- --
-
----- ----- ----- ----- ----- -----
Net increase (decrease) in net assets...... 47 53 33 29 17 44
NET ASSETS:
Beginning of year.......................... 311 258 225 278 261 217
-
----- ----- ----- ----- ----- -----
End of year................................ $ 358 $ 311 $ 258 $ 307 $ 278 $ 261
-
-
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<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
forty-one Sub-Accounts. In addition to the Sub-Accounts disclosed on the
Statements of Assets and Liabilities, Group VEL established twenty-one
additional Sub-Accounts effective December 15, 1998. The initial public offering
of these Sub-Accounts did not occur in 1998, therefore, these Sub-Accounts are
not included in the financial statements. Each Sub-Account invests exclusively
in a corresponding investment portfolio of the Allmerica Investment Trust (the
Trust) managed by Allmerica Financial Investment Management Services, Inc.
(AFIMS) (successor to Allmerica Investment Management Company, Inc.), a
wholly-owned subsidiary of the Company; or of the Variable Insurance Products
Fund (Fidelity VIP) or the Variable Insurance Products Fund II (Fidelity VIP II)
or the Variable Insurance Products Fund III (Fidelity VIP III), all of which are
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 Management Company or Delaware International Advisers Ltd.; or of
the Mutual Fund Variable Annuity Trust (MFVAT) managed by the Chase Manhattan
Bank, N.A. The Trust, Fidelity VIP, Fidelity VIP II, Fidelity VIP III, T. Rowe
Price, DGPF, and MFVAT (the Funds) are open-end, management investment companies
registered under the 1940 Act.
Effective January 9, 1998, Small-Mid Cap Value Fund was renamed 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 Funds. 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 Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. 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>
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 Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
Growth.................................. 152 $324 $2.825
Investment Grade Income................. 240 256 1.132
Money Market............................ 242 242 1.000
Equity Index............................ 148 259 3.408
Government Bond......................... 242 249 1.068
Select Aggressive Growth................ 158 249 2.460
Select Growth........................... 215 267 2.428
Select Growth and Income................ 235 278 1.779
Select Value Opportunity*............... 221 275 1.685
Select International Equity............. 218 229 1.542
Select Capital Appreciation............. 241 266 1.640
Select Emerging Markets................. -- -- 0.784
Select Strategic Growth................. -- -- 0.973
Fidelity VIP High Income................ 25 275 11.530
Fidelity VIP Equity-Income.............. 15 266 25.420
Fidelity VIP Growth..................... 11 278 44.870
Fidelity VIP Overseas................... 15 248 20.050
Fidelity VIP II Asset Manager........... 20 286 18.160
T. Rowe Price International Stock....... -- -- 14.520
DGPF International Equity............... 19 229 16.480
</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. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value.
The Company makes a charge of up to 0.90% per annum based on the average
daily net asset value of each certificate (certificate value) in each
Sub-Account for mortality and expense risks. This charge may be different
between groups and increased or decreased within a group, subject to compliance
with applicable state and federal requirements, but the total charge may not
exceed 0.90% per annum. During the first 10 policy years, the Company may charge
up to 0.25% per annum based on the certificate value in each Sub-Account for
administrative expenses. These expenses are included in insurance and other
charges on the statements of operations and changes in net assets.
SA-8
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
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 and to independent broker-dealers by the Company. The current series
of policies have a surrender charge and no deduction is made for sales charges
at the time of the sale. For the years ended December 31, 1998, 1997, and 1996,
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 policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Group VEL satisfies the current requirements
of the regulations, and it intends that Group VEL will continue to meet such
requirements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Group
VEL during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- --------- -----
<S> <C> <C>
Growth................................................. $ 8 $ --
Investment Grade Income................................ 15 --
Money Market........................................... 12 --
Equity Index........................................... 17 --
Government Bond........................................ 14 --
Select Aggressive Growth............................... -- --
Select Growth.......................................... 4 --
Select Growth and Income............................... 6 --
Select Value Opportunity*.............................. 4 --
Select International Equity............................ 4 --
Select Capital Appreciation............................ 60 --
Select Emerging Markets................................ -- --
Select Strategic Growth................................ -- --
Fidelity VIP High Income............................... 34 --
Fidelity VIP Equity-Income............................. 23 --
Fidelity VIP Growth.................................... 49 --
Fidelity VIP Overseas.................................. 21 --
Fidelity VIP II Asset Manager.......................... 40 --
T. Rowe Price International Stock...................... -- --
DGPF International Equity.............................. 11 --
--------- -----
Totals............................................... $322 $ --
--------- -----
--------- -----
</TABLE>
* Name changed. See Note 1.
SA-10
<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-references for Prospectuses A, B, and C to items required by Form N-8B-2
Prospectus A consists of ____ pages
Prospectus B consists of ____ pages
Prospectus C 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 Registrant's Initial Registration
Statement on June, 1996 ,and is incorporated by reference herein.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement between
the Company and Allmerica Investments, Inc. was previously
filed on April 16, 1998 in Post-Effective Amendment No. 4,
and is incorporated by reference herein.
(b) Registered Representatives/Agents Agreement was 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 are
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.
(h) Form of Delaware Wholesaling Agreement was previously filed on
December 15, 1998 in Post-Effective Amendment No. 6, and is
incorporated by reference herein.
<PAGE>
(4) Not Applicable.
(5) Policy and Policy riders were previously filed on April 16, 1998
in Post-Effective Amendment No. 4, and are 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 Initial Registration Statement on
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 Funds III was previously filed on October 15, 1998
in Post-Effective Amendment No. 5, and is incorporated by
reference herein.
(e) Form of Amendment to Participation Agreement with Delaware
Group Premium Fund, Inc. was previously filed on December 15,
1998 in Post-Effective Amendment No. 6, 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.
(l) Form of Participation Agreement with Mutual Fund Variable
Annuity Trust was previously
<PAGE>
filed on December 15, 1998 in Post-Effective Amendment No. 6,
and is incorporated by reference herein.
(9) Directors' Power of Attorney is filed herewith.
(10) Amended 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 are 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.
<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 of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the 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 November l, 1999.
GROUP VEL ACCOUNT
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Mary Eldridge
-----------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President November 1, 1999
- ------------------------------------ and Corporate Controller
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief
- ------------------------------------ Financial Officer and Treasurer
Richard M. Reilly* Director and Vice President
- ------------------------------------
John F. O'Brien* Director, President and Chief
- ------------------------------------ Executive Officer
Bruce C. Anderson* Director and Vice President
- ------------------------------------
Robert E. Bruce* Director, Vice President and
- ------------------------------------ Chief Information Officer
John P. Kavanaugh* Director, Vice President and
- ------------------------------------ Chief Investment Officer
John F. Kelly* Director, Senior Vice President
- ------------------------------------ and General Counsel
James R. McAuliffe* Director
- ------------------------------------
Robert P. Restrepo, Jr.* Director and Vice President
- ------------------------------------
Eric A. Simonsen* Director and Vice President
- ------------------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated July 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-06383)
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(9) Directors' Power of Attorney
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by First Allmerica Financial Life Insurance
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and with any
other regulatory agency or state authority that may so require, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and Chief Executive 7/1/99
- ----------------------------- Officer
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 7/1/99
- -----------------------------
Bruce C. Anderson
/s/ Robert E. Bruce Director, Vice President and 7/1/99
- ----------------------------- Chief Information Officer
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 7/1/99
- ----------------------------- Chief Investment Officer
John P. Kavanaugh
/s/ John F. Kelly Director, Senior Vice President and 7/1/99
- ----------------------------- General Counsel
John F. Kelly
/s/ J. Barry May Director 7/1/99
- -----------------------------
J. Barry May
/s/ James R. McAuliffe Director 7/1/99
- -----------------------------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief Financial 7/1/99
- ----------------------------- Officer and Treasurer
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 7/1/99
- -----------------------------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 7/1/99
- -----------------------------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 7/1/99
- -----------------------------
Eric A. Simonsen
/s/ Phillip E. Soule Director and Vice President 7/1/99
- -----------------------------
Phillip E. Soule
</TABLE>
<PAGE>
December 1, 1999
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.'S: 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 group flexible premium variable life insurance
policies.
I am of the following opinion:
1. The Group VEL Account is a separate account of the Company validly
existing pursuant to the 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>
December 1, 1999
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.'S: 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 group premium variable life
insurance policies ("Policies") allocated to the Group VEL Account under the
Securities Act of 1933. The Prospectuses included in this Post-Effective
Amendment to the Registration Statement describe the Policies. I am familiar
with and have provided actuarial advice concerning the preparation of the
Post-Effective Amendment to the Registration Statement, including exhibits.
In my professional opinion, the illustrations 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 H. Mawdsley
William H. 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. 8 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 2, 1999, except for paragraph 2 of Note 18 and
Note 20, which are as of March 19, 1999 and April 1, 1999, respectively,
relating to the financial statements of First Allmerica Financial Life
Insurance Company, and our report dated March 26, 1999, 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
December 17, 1999
