<PAGE>
Registration No. 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
Initial Registration Statement
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:
_____ 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)
_____ 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, 1999 was filed on or
before March 30, 2000.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registrations Statement
shall become effective in accordance with Section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such date or
dates as the Commission, acting pursuant to said Section 8(a) may determine.
Registrant is making this filing in order to register a new flexible premium
variable life policy, under Securities Act of 1933.
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RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
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<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS
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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 Underlying Funds
13.................Summary; The Underlying Funds; 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 Underlying Funds; Premium Payments; Allocation of Net Premiums
17.................Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18.................The Group VEL Account; The Underlying Funds; 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
42.................Not Applicable
43.................Not Applicable
44.................Premium Payments; Certificate Value and Surrender Value
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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>
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED ___________, 2000
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653
GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CONTRACTS
GROUP VARIABLE LIFE
This Prospectus provides important information about a group and individual
flexible premium variable life insurance contract offered by First Allmerica
Financial Life Insurance Company. (Individual policies or certificates under a
group contract are collectively referred to as Certificates). Certificates are
available to eligible applicants who are members of a non-qualified benefit plan
generally having a minimum of five or more members, depending on the group, and
who are Age 85 years old and under. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE
INVESTING AND KEEP IT FOR FUTURE REFERENCE.
The Certificates are funded through the Group VEL Account, a separate investment
account of the Company that is referred to as the Separate Account and through
the Fixed Account. The Separate Account is subdivided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of one of the following Funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Aggressive Growth Fund Fidelity VIP II Contrafund Portfolio
Select Capital Appreciation Fund
Select Value Opportunity Fund GOLDMAN SACHS VARIABLE INSURANCE TRUST
Select Emerging Markets Fund Goldman Sachs VIT Capital Growth Fund
Select International Equity Fund Goldman Sachs VIT CORE Large Cap Growth Fund
Select Growth Fund Goldman Sachs VIT CORE Small Cap Equity Fund
Select Strategic Growth Fund
Core Equity Fund J.P. MORGAN SERIES TRUST II
Select Growth and Income Fund J.P. Morgan Small Company Portfolio
Select Investment Grade Income Fund
Government Bond Fund PIMCO VARIABLE INSURANCE TRUST
Money Market Fund PIMCO Total Return Bond Portfolio II
DEUTSCHE ASSET MANAGEMENT VIT FUNDS THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
Deutsche VIT Equity 500 Index UIF Technology Portfolio
Deutsche VIT Small Cap Index Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND T. Rowe Price International Stock Portfolio
Fidelity VIP Overseas Portfolio
Fidelity VIP Equity-Income Portfolio WARBURG PINCUS TRUST
Fidelity VIP Growth Portfolio Warburg Pincus Small Company Growth Portfolio
Fidelity VIP High Income Portfolio Warburg Pincus Global Post-Venture Capital
Portfolio
</TABLE>
THE CERTIFICATES ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. VARIABLE LIFE
POLICIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. IT MAY NOT BE
ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH THE CERTIFICATE.
THIS LIFE CERTIFICATE IS NOT: A BANK DEPOSIT OR OBLIGATION; OR FEDERALLY
INSURED; OR ENDORSED BY ANY BANK OR GOVERNMENTAL AGENCY. THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
CORRESPONDENCE MAY BE MAILED TO:
ALLMERICA LIFE
P.O. BOX 8179
BOSTON, MA 02266-8179
PROSPECTUS DATED ____________, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND CHARGES................................. 7
SUMMARY OF CERTIFICATE FEATURES............................. 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE
UNDERLYING FUNDS........................................... 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 21
VOTING RIGHTS............................................... 23
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 24
THE CERTIFICATE............................................. 25
Enrollment Form for a Certificate......................... 25
Free-Look Period.......................................... 25
Conversion Privileges..................................... 26
Premium Payments.......................................... 26
Allocation of Net Premiums................................ 27
Transfer Privilege........................................ 27
Election of Death Benefit Options......................... 28
Guideline Premium Test and Cash Value Accumulation Test... 29
Death Proceeds............................................ 30
Change in Death Benefit Option............................ 31
Change in Face Amount..................................... 31
Certificate Value and Surrender Value..................... 32
Payment Options........................................... 33
Optional Insurance Benefits............................... 34
Surrender................................................. 34
Partial Withdrawal........................................ 34
CHARGES AND DEDUCTIONS...................................... 34
Premium Expense Charge.................................... 35
Monthly Deduction from Certificate Value.................. 36
Charges Reflected in the Assets of the Separate Account... 39
Transaction Charge on Partial Withdrawal.................. 39
Transfer Charges.......................................... 39
Other Administrative Charges.............................. 39
CERTIFICATE LOANS........................................... 39
CERTIFICATE TERMINATION AND REINSTATEMENT................... 41
OTHER CERTIFICATE PROVISIONS................................ 42
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 44
DISTRIBUTION................................................ 45
REPORTS..................................................... 45
LEGAL PROCEEDINGS........................................... 46
FURTHER INFORMATION......................................... 46
FEDERAL TAX CONSIDERATIONS.................................. 46
The Company and the Separate Account...................... 46
Taxation of the Certificates.............................. 47
Certificate Loans......................................... 47
Modified Endowment Contracts.............................. 48
MORE INFORMATION ABOUT THE FIXED ACCOUNT.................... 48
INDEPENDENT ACCOUNTANTS..................................... 49
FINANCIAL STATEMENTS........................................ 50
APPENDIX A -- OPTIONAL BENEFITS............................. A-1
APPENDIX B -- PAYMENT OPTIONS............................... B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE
VALUES AND ACCUMULATED PREMIUMS............................ C-1
</TABLE>
2
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<TABLE>
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APPENDIX D -- MONTHLY EXPENSE CHARGE TABLE.................. D-1
APPENDIX E -- PERFORMANCE INFORMATION....................... E-1
FINANCIAL STATEMENTS........................................ FIN-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
AGE: The Insured's age as of the last birthday measured from a Certificate
anniversary.
ALLMERICA FINANCIAL: Allmerica Financial Life Insurance and Annuity Company.
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
CERTIFICATE OWNER: The persons or entity entitled to exercise the rights and
privileges under the certificate.
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the Fixed Account
credited to that Certificate.
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for any Outstanding Loan at the
time of the Insured's death, and partial withdrawals, if any, and any due and
unpaid Monthly Deductions. The amount of the Death Benefit will depend on the
Death Benefit Option chosen, but will always be at least equal to the Face
Amount.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less any
Outstanding Loan at the time of the Insured's death, partial withdrawals, if
any, and any due and unpaid Monthly Deductions. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate.
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
ENROLLMENT FORM OR APPLICATION: The form that is completed and signed by the
Owner and employee, if applicable, when applying for insurance coverage.
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
FACE AMOUNT: The total amount of insurance coverage applied for, including the
base amount of insurance coverage ("Base Amount") and the benefit provided under
the Insured Term Rider, if any. The Face Amount of each Certificate is set forth
in the specifications pages of the Certificate.
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
100th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate. The Net Death Benefit may be different
before and after the Final Payment Date. See DEATH PROCEEDS.
FIRST ALLMERICA: First Allmerica Financial Life Insurance Company. "We," "our,"
"us," and "the Company" refer to First Allmerica Financial Life Insurance
Company in this Prospectus.
4
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FIXED ACCOUNT: The Fixed Account is an investment option that is funded by the
Company's general account. The general account includes all of the assets of the
Company other than those held in a Separate Account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard Ordinary
Mortality Tables (Age Last Birthday), Smoker or Non-Smoker, Male, Female, Unisex
(Table B), net investment earnings at an annual effective rate of 5%, and fees
and charges as set forth in the Certificate and any Certificate riders.
GUIDELINE MINIMUM DEATH BENEFIT: The Guideline Minimum Death Benefit required to
qualify the Certificate as "life insurance" under federal tax laws. The
Guideline Minimum Death Benefit varies by Age. It is calculated by multiplying
the Certificate Value by a percentage determined by the Insured's Age. The
percentage factor is a percentage that, when multiplied by the Certificate
Value, determines the Guideline Minimum death benefit required under federal tax
laws. If Option 3 is in effect, the percentage factor is based on the Insured's
attained age, sex, risk classification, as set forth in the Certificate. For
both the Option 1 and the Option 2, the percentage factor is based on the
Insured's attained age, as set forth in GUIDELINE MINIMUM DEATH BENEFIT TABLE in
DEATH PROCEEDS -- "GUIDELINE MINIMUM DEATH BENEFIT UNDER OPTION 1 AND
OPTION 2."
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
ISSUANCE: The date the Company mails the Certificate if the enrollment form is
approved with no changes requiring your consent; otherwise, the date the Company
receives your written consent to any changes.
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly expense charge, the monthly
Separate Account administrative charge and the monthly mortality and expense
risk charge.
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
NET PREMIUM: An amount equal to the premium less any premium expense charge.
OUTSTANDING LOAN: All unpaid Certificate loans plus interest due or accrued on
such loans.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the Fixed Account and the Sub-Accounts, in the same
proportion that the Certificate Value in the Fixed Account and the Certificate
Value in each Sub-Account bear to the total unloaned Certificate Value on the
date of deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Underlying Fund.
5
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SURRENDER CHARGE: There is no surrender charge.
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Outstanding Loan.
UNDERLYING FUND ("FUNDS"): The Funds of the Allmerica Investment Trust ("AIT"),
the Funds of Deutsche Asset Management VIT Funds, the Portfolios of the Fidelity
Variable Insurance Products Fund ("Fidelity VIP") and Fidelity Variable
Insurance Products Fund II ("Fidelity VIP II"), the Funds of Goldman Sachs
Variable Insurance Trust, the Portfolio of J.P. Morgan Series Trust II, the
Portfolio of The Universal Institutional Funds, Inc. ("UIF"), the Portfolio of
PIMCO Variable Insurance Trust, the Portfolio of T. Rowe Price International
Series, Inc. ("T. Rowe Price"), and the Portfolios of Warburg Pincus Trust,
which are available under the Certificates.
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge, the monthly expense charge, and the amount
of premium required to keep the Certificate in force.
UNIT: A measure of your interest in a Sub-Account.
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
WRITTEN REQUEST: A request by the Certificate Owner, in writing, satisfactory to
the Company.
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
6
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SUMMARY OF FEES AND CHARGES
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The Federal
DAC tax deduction may range from zero up to 2% (up to 4% for certain COLI
policies) of premiums, depending on the group to which the Policy is issued The
charge for distribution expenses may range from zero to 10%.
For more information, see CHARGES AND DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes the
following charges:
- The cost of insurance. The amount charged for the cost of insurance will
vary with the age and underwriting class of the Insured. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value".
- Certificate administrative expenses. The charge may be up to $10 monthly,
depending on the group to which the Policy is issued.
- For the first five Certificate years, a monthly expense charge to
reimburse the Company for underwriting and acquisition costs. The charge
is equal to a specified amount that varies with the Insured's Age and
underwriting class for each $1,000 of the Certificate's Base Amount on the
Date of Issue. For more information, see APPENDIX D -- MONTHLY EXPENSE
CHARGE TABLE.
- Separate Account administrative expenses. The Separate Account
administrative charge may continue for up to 10 Certificate years and may
be up to 0.25% of Certificate Value in each Sub-Account, depending on the
group to which the Policy was issued.
- Mortality and expense risks. The mortality and expense risk charge may be
up to 0.90% of Certificate Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses, the Monthly Expense Charge, the
mortality and expense risk charge, and any charge for the cost of additional
benefits provided by rider will be deducted. If no allocation is specified, the
Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against Certificate Value in each Sub-Account that generates
a charge. In the event that a charge is greater than the value of the
Sub-Account to which it relates on a Monthly Processing Date, the unpaid balance
will be totaled and the Company will make a Pro-Rata Allocation.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. After the Final Premium Payment Date,
a deduction for mortality and expense risk charges will continue to be assessed
monthly. No other Monthly Deductions will be made on or after the Final Premium
Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Certificate
Value."
7
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TRANSACTION CHARGES
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is up to the smaller of $25 or 2% of the amount
withdrawn, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. See CHARGES AND
DEDUCTIONS -- "Transaction Charge on Partial Withdrawal." The transaction fee
applies to all partial withdrawals.
TRANSFER CHARGE
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. This charge may be increased, but is guaranteed not
to exceed $25. See THE CERTIFICATE -- "Transfer Privilege" and CHARGES AND
DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE CHARGES -- The Company reserves the right to impose a
charge (not to exceed $25) for the administrative costs associated with changing
the Net Premium allocation instructions, for changes in face amount, for
changing the allocation of any Monthly Deductions among the various
Sub-Accounts, or for a projection of values. See CHARGES AND DEDUCTIONS --
"Other Administrative Charges."
OPTIONAL RIDER CHARGES -- Additional insurance benefits may be made available
under certain optional insurance riders for an additional charge. See APPENDIX
A -- OPTIONAL BENEFITS.
8
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CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. The levels of fees
and expenses vary among the Underlying Funds. The following table shows the
expenses of the Underlying Funds for 1999.
<TABLE>
<CAPTION>
OTHER EXPENSES TOTAL
MANAGEMENT FEE (AFTER ANY FUND EXPENSES
(AFTER ANY 12-B-1 WAIVERS/ (AFTER ANY WAIVERS/
UNDERLYING FUND VOLUNTARY WAIVERS) FEES REIMBURSEMENTS) REIMBURSEMENTS)
--------------- ------------------ ------------ --------------- -------------------
<S> <C> <C> <C> <C>
UIF Technology Portfolio............ 0.80% 0.00% 0.35% 1.15%(+)
Select Strategic Growth Fund........ 0.85% 0.00% 0.35% 1.20%(1)(2)
Warburg Pincus Small Company
Growth Portfolio................... 0.90% 0.00% 0.24% 1.14%
Warburg Pincus Global Post-Venture
Capital Portfolio.................. 1.07% 0.00% 0.33%(6) 1.40%(6)
Select Aggressive Growth Fund....... 0.81%* 0.00% 0.06% 0.87%(1)(2)*
Deutsche VIT Small Cap Index........ 0.00% 0.00% 0.45% 0.45%(4)
Select Capital Appreciation Fund.... 0.90%* 0.00% 0.07% 0.97%(1)*
Goldman Sachs VIT CORE Small Cap
Equity Fund........................ 0.75% 0.00% 0.25%(8) 1.00%
J.P. Morgan Small Company
Portfolio.......................... 0.60% 0.00% 0.55%(5) 1.15%(5)
Select Value Opportunity Fund....... 0.90% 0.00% 0.07% 0.97%(1)(2)
Select Emerging Markets Fund........ 1.35% 0.00% 0.57% 1.92%(1)(2)
Select International Equity Fund.... 0.89% 0.00% 0.13% 1.02%(1)(2)
Fidelity VIP Overseas Portfolio..... 0.73% 0.00% 0.18% 0.91%(3)
T. Rowe Price International Stock
Portfolio.......................... 1.05% 0.00% 0.00% 1.05%
Fidelity VIP Growth Portfolio....... 0.58% 0.00% 0.08% 0.66%(3)
Select Growth Fund.................. 0.78% 0.00% 0.05% 0.83%(1)(2)
Goldman Sachs VIT Capital Growth
Fund............................... 0.75% 0.00% 0.25%(8) 1.00%
Core Equity Fund.................... 0.43% 0.00% 0.05% 0.48%(1)(2)
Fidelity VIP II Contrafund
Portfolio.......................... 0.58% 0.00% 0.09% 0.67%(3)
Goldman Sachs VIT CORE Large Cap
Growth Fund........................ 0.70% 0.00% 0.20%(8) 0.90%
Select Growth and Income Fund....... 0.67% 0.00% 0.07% 0.74%(1)(2)
Deutsche VIT Equity 500 Index....... 0.09% 0.00% 0.21% 0.30%(4)
Fidelity VIP Equity-Income
Portfolio.......................... 0.48% 0.00% 0.09% 0.57%(3)
Fidelity VIP High Income
Portfolio.......................... 0.58% 0.00% 0.11% 0.69%
PIMCO Total Return Bond Portfolio
II................................. 0.25% 0.15% 0.25%(7) 0.65%
Select Investment Grade Income
Fund............................... 0.43% 0.00% 0.07% 0.50%(1)
Government Bond Fund................ 0.50% 0.00% 0.12% 0.62%(1)
Money Market Fund................... 0.24% 0.00% 0.05% 0.29%(1)
</TABLE>
* Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised. The
Management Fee and Total Fund Expense ratios shown in the table above have been
adjusted to assume that the revised rates took effect January 1, 1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income
Fund, and Government Bond Fund, and 0.60% for Money Market Fund. The total
operating expenses of these Funds of the Trust were less than their respective
expense limitations throughout 1999.
9
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Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In 1999 the
Select Strategic Growth Fund received a reimbursement of $813 under its expense
limitation. However, this amount was not enough to make a difference in the
percentage shown as the Fund's total operating expenses and expense limitation
(both 1.20%).
Until further notice, AFIMS has agreed to voluntarily waive its management fee
to the extent that expenses of the Select Emerging Markets Fund exceed 2.00% of
the Fund's average daily net assets, except that such waiver shall not exceed
the net amount of management fees earned by AFIMS from the Fund after
subtracting fees paid by AFIMS to a sub-advisor.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. Including these reductions, total annual fund operating expenses
were 1.01% for Select International Equity Fund, 1.88% for Select Emerging
Markets, 0.84% for Select Aggressive Growth Fund, 0.88% for Select Value
Opportunity Fund, 0.81% for Select Growth Fund, 1.17% for Select Strategic
Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth and Income
Fund.
(3) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds, or
Fidelity Management & Research Company on behalf of certain funds, custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.56% for the Fidelity VIP Equity-Income Portfolio; 0.65%
for the Fidelity VIP Growth Portfolio; and 0.65% for the Fidelity VIP II
Contrafund Portfolio.
(4) The Advisor has voluntarily undertaken to waive and reimburse its fee to the
Funds' for certain expenses so that the Funds' total operating expenses will not
exceed 0.45% for the Deutsche VIT Small Cap Index and will not exceed 0.30% for
the Deutsche VIT Equity 500 Index. Without the reimbursement to the Funds for
the year ended 12/31/99, the Management Fee, Other, and Total Expenses would
have been 0.35%, 0.83%, and 1.18% for the Deutsche VIT Small Cap Index and
0.20%, 0.23%, and 0.43% for the Deutsche VIT Equity 500 Index.
(5) These fees reflect an agreement by the Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the portfolio, to the extent
certain expenses exceed 1.15% of the portfolio's average daily net assets during
fiscal year 2000. Had there been no fee waiver and expense reimbursements, Other
Expenses and Total Fund Expenses would have been 1.97% and 2.57%, respectively.
(6) The investment adviser of the Warburg Pincus Global Post-Venture Capital
Portfolio has voluntarily agreed to waive or reimburse a portion of the
management fees and/or other expenses resulting in a reduction of total
expenses. Absent any waiver or reimbursement, the Management Fee, Other Expenses
and Total Portfolio Expenses would have been 1.25%, 0.33% and 1.58% for the
Warburg Pincus Global Post-Venture Capital Portfolio, respectively, for the year
ended December 31, 1999.
(7) Other Expenses reflect a 0.25% Administrative Fee and 0.13% representing the
Portfolio's organizational expenses as attributed to the class and pro-rata
Trustees' fees.
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(8) Goldman Sachs Asset Management has voluntarily agreed to reduce or limit
certain other expenses (excluding management fees, taxes, interest, brokerage
fees, such expenses). Without any such limitation or reduction, the Other
Expenses would have been 0.42% for the Goldman Sachs VIT CORE Large Cap Growth
Fund, 0.96% for the Goldman Sachs VIT CORE Small Cap Equity Fund, and 1.06% for
the Goldman Sachs VIT Capital Growth Fund.
(+) Morgan Stanley Asset Management ("MSAM") has voluntarily agreed to waive its
management fees and to reimburse the UIF Technology Portfolio if processing of
such fees would cause the total annual operating expenses of the portfolio to
exceed 1.15% of average daily net assets. This fee waiver and reimbursement are
voluntary and may be terminated at any time without notice. Without the
reimbursement, total fund expenses would have been 12.57% in 1999
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
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SUMMARY OF CERTIFICATE FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Certificate. If you are considering the purchase of
this product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Certificate, together with its attached application, constitutes the entire
agreement between you and the Company.
Within limits, you may choose the amount of initial premium desired and the
initial Death Benefit. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Certificate's Surrender Value, or the Certificate may
be fully surrendered at any time, subject to certain limitations.
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the Fixed
Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any Outstanding Loan is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
You may choose among three Death Benefit Options. See THE CERTIFICATE --
"Election of Death Benefit Options" and "Guideline Premium Test and Cash Value
Accumulation Test." If the Certificate is in effect at the death of the Insured,
the Company will pay a Death Benefit (the "Death Proceeds") to the Beneficiary.
Prior to the Final Premium Payment Date, the Death Proceeds equal the Death
Benefit, less any Outstanding Loan, partial withdrawals, and any due and unpaid
charges. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Certificate. A Minimum Death Benefit, equivalent to a
percentage of the Certificate Value, will apply if greater than the Death
Benefit otherwise payable.
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
THE CERTIFICATE
The Certificate allows you, subject to certain limitations, to make premium
payments in any amount and frequency. As long as the Certificate remains in
force, it will provide for:
- life insurance coverage on the named Insured;
- Certificate Value;
- surrender rights and partial withdrawal rights;
- loan privileges; and
- in some cases, additional insurance benefits available by rider.
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are
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"flexible premium" Certificates, because, unlike traditional insurance policies,
there is no fixed schedule for premium payments. However, you may be required to
provide evidence of insurability as a condition to our accepting any payment
that would increase the Insurance Amount at Risk (the Death Benefit less the
Certificate Value). See THE CERTIFICATE -- "Premium Payments." Although you may
establish a schedule of premium payments ("planned premium payments"), failure
to make the planned premium payments will not necessarily cause a Certificate to
lapse, nor will making the planned premium payments guarantee that a Certificate
will remain in force. Thus, you may, but are not required to, pay additional
premiums. The Company may limit the maximum payment received in any certificate
year, but in no event will the limit be less than the maximum Level Premium
shown in the Certificate.
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the Fixed Account
of the Company credited to the Certificate. The Certificate Value reflects the
amount and frequency of Net Premiums paid, charges and deductions imposed under
the Certificate, interest credited to accumulations in the Fixed Account,
investment performance of the Sub-Accounts to which Certificate Value has been
allocated, and partial withdrawals. The Certificate Value may be relevant to the
computation of the Death Proceeds. You bear the entire investment risk for
amounts allocated to the Separate Account. The Company does not guarantee a
minimum Certificate Value.
The Surrender Value will be the Certificate Value, less any Outstanding Loan.
The Surrender Value is relevant, for example, in the computation of the amounts
available upon partial withdrawals, Certificate loans or surrender.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the Fixed Account, or to any
combination of accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
CERTIFICATE ISSUANCE
At the time of enrollment, the Owner and Insured, if applicable, will complete
an enrollment form. Upon payment of the initial premium, temporary insurance
will be provided. If any premiums are paid prior to the issuance of the
Certificate, such premiums will be held in the Fixed Account. If your enrollment
form is approved and the Certificate is issued and accepted, the initial
premiums held in the Fixed Account will be credited with interest at a specified
rate beginning not later than the date of receipt of the premiums at the
Company's Principal Office. IF A CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE
INITIAL PREMIUMS WILL BE RETURNED TO YOU WITHOUT INTEREST.
Premiums allocated to the Fixed Account will earn a fixed rate of interest. Net
Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE FIXED ACCOUNT.
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If your Certificate provides for a full refund of the initial payment under its
"Right to Examine Certificate" provision (as may be required in your state),
upon issuance all Certificate Value in the Fixed Account that you initially
designated to go to the Separate Account will be transferred to the Sub-Account
investing in the Money Market Fund of AIT. All Certificate Value will be
allocated as you have chosen not later than the expiration of the period during
which you may exercise the "Right to Examine Certificate" provision. See THE
CERTIFICATE -- "Enrollment Form for a Certificate" and "Free-Look Period."
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by returning it to us or to one of our representatives within 10
days (or such later date as required in your state) after you receive the
Certificate. If your Certificate was purchased in New York as a replacement for
an existing policy, you after the right to cancel for up to 60 days after your
receive the Certificate. After an increase in The Face Amount, a right to cancel
the increase also applies. When you return the Certificate, the Company will
mail a refund to you within seven days. The refund of any premium paid by check
may be delayed until the check has cleared your bank. If your Certificate
provides for a full refund of the initial premium under its "Right-to-Examine
Certificate" provision as required in you state, your refund will be the greater
of (a) your entire premium, or (b) the Certificate Value plus deductions under
the Certificate, or by the Underlying Funds for taxes, charges or fees.
If your Certificate does not provide for a full refund of the initial premium,
you will receive the Certificate Value in the Separate Account, plus premiums
paid (including fees and charges), minus the amounts allocated to the Separate
Account, plus the fees and charges imposed on amounts in the Separate Account."
For more information, see THE CERTIFICATE -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert the Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the Fixed Account and instructing the
Company to allocate all future premiums to the Fixed Account. Where required by
state law, and at your request, the Company will issue a flexible premium
adjustable life insurance policy to you. The new Certificate will have the same
face amount, issue Age, Date of Issue, and risk classifications as the original
Certificate. See THE CERTIFICATE -- "Conversion Privileges."
PARTIAL WITHDRAWAL
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. See THE CERTIFICATE -- "Partial Withdrawal"
and CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
LOAN PRIVILEGE
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. The Loan Value is 90% of an amount equal to Certificate Value.
Certificate loans will be allocated among the Fixed Account and the Sub-Accounts
in accordance with your instructions. If no allocation is made by you, the
Company will make a Pro-Rata Allocation among the Accounts. In either case,
Certificate Value equal to the Certificate loan will be transferred from the
appropriate Sub-Accounts to the Fixed Account, and will earn monthly interest at
an effective annual rate of not less
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than 4%. Therefore, a Certificate loan may have a permanent impact on the
Certificate Value even though it is eventually repaid. Although the loan amount
is a part of the Certificate Value, the Death Proceeds will be reduced by the
amount of any Outstanding Loan at the time of death.
Certificate loans will bear interest at a fixed rate of 4.9%, guaranteed not to
be greater than 5.5% per year, due and payable in arrears at the end of each
Certificate year. If interest is not paid when due, it will be added to the loan
balance. Certificate loans may be repaid at any time. You must notify the
Company if a payment is a loan repayment; otherwise, it will be considered a
premium payment. Any partial or full repayment of any Outstanding Loan by you
will be allocated to the Fixed Account or Sub-Accounts in accordance with your
instructions. If you do not specify an allocation, the Company will allocate the
loan repayment in accordance with your most recent premium allocation
instructions. See CERTIFICATE LOANS.
PREFERRED LOAN OPTION
If approved in your state, a preferred loan option is automatically available
under the Certificates. It may be revoked by you upon written request at any
time. If this option is available, after the tenth certificate anniversary
Certificate Value in the Fixed Account equal to the loan amount will be credited
with interest at an effective annual yield of not less than 4%. Preferred loans
currently bear interest at a fixed rate of 4% (guaranteed not to be greater than
4.5%).
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Certificate. See FEDERAL TAX
CONSIDERATIONS -- "Certificate Loans." Consult a qualified tax adviser (and see
FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT AVAILABLE IN ALL
STATES.
CERTIFICATE LAPSE AND REINSTATEMENT
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Certificate Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued, if any, or (b) Outstanding Loan exceeds the
Certificate Value. A 62-day grace period applies to each situation. Subject to
certain conditions (including Evidence of Insurability showing that the Insured
is insurable according to the Company's underwriting rules and the payment of
sufficient premium), the Certificate may be reinstated at any time within three
years after the expiration of the grace period and prior to the Final Premium
Payment Date. See CERTIFICATE TERMINATION AND REINSTATEMENT.
DEATH PROCEEDS
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. The Death Proceeds under the
Certificate may be received in a lump sum or under one of the Payment Options
the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
Three Death Benefit Options are available. Under Option 1 and Option 3, the
Death Benefit is the greater of the Face Amount or the applicable Minimum Death
Benefit. Under Option 2, the Death Benefit is the greater of the Face Amount
plus the Certificate Value or the Minimum Death Benefit. The Minimum Death
Benefit is equivalent to a percentage (determined each month based on the
Insured's Age) of the Certificate Value. See THE CERTIFICATE -- "Election of
Death Benefit Options" and "Guideline Premium Test and Cash Value Accumulation
Test."
Prior to the Final Premium Payment Date, the Death Proceeds will be equal to the
Death Benefit, reduced by any Outstanding Loan, partial withdrawals, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. On or after the Final Premium Payment Date, the Death
Proceeds will equal the Surrender Value. See THE CERTIFICATE -- "Death
Proceeds."
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FLEXIBILITY TO ADJUST DEATH BENEFIT
Subject to certain limitations, you may adjust the Death Benefit (and thus the
Death Proceeds), at any time prior to the Final Premium Payment Date by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges. See THE
CERTIFICATE -- "Change in Face Amount."
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE --"Free-Look Period" and "Conversion Privileges."
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Insured Term Rider. See APPENDIX A -- OPTIONAL BENEFITS.
The cost of these optional insurance benefits, if any, will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value."
INVESTMENT OPTIONS
The Certificates permit Net Premiums to be allocated either to the Fixed Account
or to the Separate Account. The Separate Account consists of 53 Sub-Accounts, of
which 28 are available under the Certificates. Currently, the Policyholder may
select up to 22 Sub-Accounts (the 12 Sub-Accounts investing in the Underlying
Funds of AIT plus up to 10 other Sub-Accounts), and the Certificates Owners may
make allocations only to those selected Sub-Accounts over the life of the
Policy.
Each Sub-Account invests exclusively in a corresponding Underlying Fund of one
of the following:
- Allmerica Investment Trust ("AIT") managed by Allmerica Financial
Investment Management Services, Inc. ("AFIMS")
- Deutsche Asset Management VIT Funds managed by Bankers Trust Company
- Fidelity Variable Insurance Products Fund ("Fidelity VIP") or the Fidelity
Variable Insurance Products Fund II ("Fidelity VIP II") managed by
Fidelity Management & Research Company ("FMR")
- Goldman Sachs Variable Insurance Trust managed by Goldman Sachs Asset
Management
- J.P. Morgan Series Trust II managed by J.P. Morgan Investment Management
Inc.
- PIMCO Variable Insurance Trust managed by Pacific Investment Management
Company LLC ("PIMCO")
- The Universal Institutional Funds, Inc. ("UIF"), managed by Morgan Stanley
Asset Management
- T. Rowe Price International Series, Inc. ("T. Rowe Price") managed by T.
Rowe Price International, Inc.
- Warburg Pincus Trust managed by Credit Suisse Asset Management, LLC
("CSAM").
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. The Certificates permit you to transfer
Certificate Value among the available Sub-Accounts and between the Sub-Accounts
and the Fixed Account, subject to certain limitations described under THE
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CERTIFICATE -- "Transfer Privilege." In some states, insurance regulations may
restrict the availability of particular Underlying Funds. There can be no
assurance that the investment objectives of the Underlying Funds can be
achieved.
For more information, see DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND
THE UNDERLYING FUNDS.
TAX TREATMENT
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Certificate. Death Proceeds under the Certificate are excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level annual premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
------------------------
THIS SUMMARY IS INTENDED TO PROVIDE ONLY A VERY BRIEF OVERVIEW OF THE MORE
SIGNIFICANT ASPECTS OF THE CERTIFICATE. THE PROSPECTUS AND THE CERTIFICATE
PROVIDE FURTHER DETAIL. THE CERTIFICATE PROVIDES INSURANCE PROTECTION FOR THE
NAMED BENEFICIARY. THE CERTIFICATE AND ITS ATTACHED APPLICATION OR ENROLLMENT
FORM ARE THE ENTIRE AGREEMENT BETWEEN YOU AND THE COMPANY.
THE PURPOSE OF THE CERTIFICATE IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU
ALREADY OWN A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CERTIFICATE.
NO CLAIM IS MADE THAT THE CERTIFICATE IS IN ANY WAY SIMILAR OR COMPARABLE TO A
SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
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DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company, organized under the law of Massachusetts in 1844, is the fifth
oldest life insurance company in America. Effective October 16, 1995, the
Company converted from a mutual life insurance company known as State Mutual
Life Assurance Company of America to a stock life insurance company and adopted
its present name. As of December 31, 1999, the Company and its subsidiaries had
over $25 billion in combined assets and over $43 billion of life insurance in
force. The Company is a wholly owned subsidiary of Allmerica Financial
Corporation ("AFC"). The Company's Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, telephone 508-855-1000 ("Principal
Office").
The Company is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
Our Board of Directors authorized the establishment of the Variable Account by
vote on August 20, 1991 The Variable Account meets the definition of "separate
account" under federal securities laws. It is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust under the Investment
Company Act of 1940 ("1940 Act"). This registration does not involve SEC
supervision of the management or investment practices or policies of the
Variable Account or of the Company. We reserve the right, subject to law, to
change the names of the Variable Account and the Sub-Accounts.
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account and are kept separate and apart from the general assets
of the Company. Under Delaware law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 53 Sub-Accounts, of which 28 are available under the Certificates.
Currently, the Policyholder may select up to 22 Sub-Accounts (the 12 Sub-
Accounts investing in the Underlying Funds of AIT plus up to 10 other
Sub-Accounts), and the Certificate Owners may make allocations only to those
selected Sub-Accounts over the life of the Policy.
Each Sub-Account is administered and accounted for as part of the general
business of the Company, but the income, capital gains, or capital losses of
each Sub-Account are allocated to such Sub-Account, without regard to other
income, capital gains, or capital losses of the Company or the other
Sub-Accounts. Each Sub-Account invests exclusively in a corresponding investment
portfolio ("Underlying Fund") of the Allmerica Investment Trust, the Deutsche
Asset Management VIT Funds, the Fidelity Variable Insurance Products Fund, the
Fidelity Variable Insurance Products Fund II, the Goldman Sachs Variable
Insurance Trust, the J.P. Morgan Series Trust II, the PIMCO Variable Insurance
Trust, T. Rowe Price International Series, Inc., The Universal Institutional
Funds, Inc., or the Warburg Pincus Trust.
THE UNDERLYING FUNDS
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be
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in effect for certain or all of the Underlying Funds. For specific information
regarding the existence and effect of any waiver/reimbursements see "CHARGES OF
THE UNDERLYING FUNDS" under the SUMMARY OF FEES AND CHARGES section. The
prospectuses of the Underlying Funds also contain information regarding fees for
advisory services and should be read in conjunction with this prospectus.
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust ("AIT") is an open-end, diversified, management
investment company. AIT was established as a Massachusetts business trust on
October 11, 1984 for the purpose of providing a vehicle for the investment of
assets of various separate accounts established by First Allmerica, the Company,
or other insurance companies. Twelve investment portfolios ("Funds") of AIT are
available under the Certificates, each issuing a series of shares: Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Emerging Markets Fund, Select International Equity
Fund, Select Growth Fund, Select Strategic Growth Fund, Core Equity Fund, Select
Growth and Income Fund, Select Investment Grade Income Fund, Government Bond
Fund, and Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS"), which is a
wholly-owned subsidiary of Allmerica Financial, serves as overall investment
manager of AIT under the terms of a Management Agreement. Subject to Trustee
review, AFIMS is responsible for the daily affairs of AIT and the general
management of the Funds. AFIMS performs administrative and management services
for AIT, furnishes to AIT all necessary office space, facilities and equipment,
and pays the compensation, if any, of officers and Trustees who are affiliated
with AFIMS. AIT bears all expenses incurred in its operation, other than the
expenses AFIMS assumes under the management agreement.
Under the Management Agreement with AIT, AFIMS has entered into agreements with
investment advisers ("Sub-Advisers") selected by AFIMS and Trustees in
consultation with BARRA RogersCasey, Inc. Under each Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
Fund, subject to the Trustee's instructions. The Sub-Advisers (other than
Allmerica Asset Management, Inc.) are not affiliated with the Company or AIT.
DEUTSCHE ASSET MANAGEMENT VIT FUNDS
Deutsche Asset Management is the marketing name for the asset management
activities of Deutsche Bank A.G., Deutsche Funds Management, Bankers Trust
Company, DB Alex. Brown LLC, Deutsche Asset Management, Inc., and Deutsche Asset
Management Investment Services Limited. Bankers Trust Company is the investment
advisor for the Deutsche VIT Equity 500 Index and the Deutsche VIT Small Cap
Index which are available under the Certificate. Bankers Trust Company is an
indirect wholly-owned subsidiary of Deutsche Bank A.G.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachu-setts business trust on November 13,
1981, and is registered with the SEC under the 1940 Act. Four of its investment
portfolios are available under the Certificates: the Fidelity VIP High Income
Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio
and Fidelity VIP Overseas Portfolio.
FMR is one of America's largest investment management organizations, and has its
principal business address at 82 Devonshire Street, Boston, Massachusetts. FMR
is the original Fidelity company, founded in 1946. It provides a number of
mutual funds and other clients with investment research and portfolio management
services. The Portfolios of Fidelity VIP, as part of their operating expenses,
pay a monthly management fee to FMR for managing investments and business
affairs. Various Fidelity companies perform certain activities required to
operate VIP. The prospectus of Fidelity VIP contains additional information
concerning the Portfolios, including information concerning additional expenses
paid by the Portfolios, and should be read in conjunction with this Prospectus.
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FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see discussion under "Fidelity Variable Insurance Products Fund"), is an
open-end, diversified, management investment company organized as a
Massachusetts business trust on March 21, 1988 and is registered with the SEC
under the 1940 Act. One of its investment portfolios is available under the
Certificate: Fidelity VIP II Contrafund Portfolio.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs Variable Insurance Trust is an open-end, management investment
company, which was formed under the laws of the state of Delaware on September
16, 1997. Goldman Sachs Asset Management, a unit of the Investment Management
Division of Goldman, Sachs & Co., serves as investment adviser to the Capital
Growth Fund, CORE Large Cap Growth Fund, and CORE Small Cap Equity Fund.
J.P. MORGAN SERIES TRUST II
J.P. Morgan Series Trust II (the "Trust"), a Delaware Business Trust, is an
open-end diversified management investment company established to provide for
the investment of assets of separate accounts of life insurance companies and of
qualified pension and retirement plans outside of the separate account context.
J.P. Morgan Investment Management Inc. is the investment adviser for the J.P.
Morgan Small Company Portfolio.
PIMCO VARIABLE INSURANCE TRUST
PIMCO Variable Insurance Trust (the "Trust"), a Delaware business trust, is an
open-end management investment company established under a Trust Instrument
dated October 3, 1997. Pacific Investment Management Company LLC ("PIMCO") is
the investment adviser for the PIMCO Variable Insurance Trust that was organized
in 1971. PIMCO provides investment management and advisory services to private
accounts of institutional and individual clients and to mutual funds. One of its
investment Portfolios is currently available under the Certificate: PIMCO Total
Return Bond Portfolio II.
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
The Universal Institutional Funds, Inc. ("UIF") is an open-end, management
investment company that was organized as a Maryland corporation on March 26,
1996. Morgan Stanley Asset Management ("MSAM") is the investment adviser for the
UIF Technology Portfolio. The investment portfolio available under the
Certificate is the UIF Technology Portfolio. On December 1, 1998, Morgan Stanley
Asset Management Inc. changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain instances using the name
Morgan Stanley Asset Management.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by T. Rowe
Price International, Inc. ("Price-Fleming"), is an open-end, diversified
management investment company organized in 1994 as a Maryland corporation.
Price-Fleming, founded in 1979 as a joint venture between T. Rowe Price
Associates, Inc. and Robert Fleming Holdings, Limited, is one of the largest
no-load international mutual fund asset managers, with approximately $42.5
billion (as of December 31, 1999) under management in its offices in Baltimore,
London, Tokyo, Hong Kong, Singapore and Buenos Aires. One of its investment
portfolios is available under the Certificates: the T. Rowe Price International
Stock Portfolio. An affiliate of Price-Fleming, T. Rowe Price Associates, Inc.
serves as Sub-Adviser to the Select Capital Appreciation Fund of AIT.
WARBURG PINCUS TRUST
Warburg Pincus Trust is an open-end, management investment company registered
with the SEC that was organized as a Massachusetts business trust on March 15,
1995. Credit Suisse Asset Management, LLC is the investment adviser of the
Warburg Pincus Trust. Two of its Portfolios are currently available under this
Certificates: Small Company Growth and Global Post-Venture Capital Portfolio.
Abbott Capital Management, LLC serves as sub-investment adviser for the Global
Post-Venture Capital Portfolio with respect to the Portfolio's investments in
private-equity portfolios.
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INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
UIF TECHNOLOGY PORTFOLIO -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of companies that the investment
adviser expect to benefit from their involvement in technology and
technology-related industries.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
WARBURG PINCUS SMALL COMPANY GROWTH PORTFOLIO -- seeks long-term growth of
capital. To pursue this goal, it invests in equity securities of small U.S.
growth companies.
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL PORTFOLIO -- seeks long-term growth
of capital. To pursue this goal, it invests primarily in equity securities of
U.S. and foreign companies considered to be in their post-venture capital stage
of development.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.
DEUTSCHE VIT SMALL CAP INDEX -- seeks to match, as closely as possible, before
expenses, the performance of the Russell 2000 Small Stock Index, which
emphasizes stocks of small U.S. companies.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund invests primarily in common stock of industries and
companies which are believed to be experiencing favorable demand for their
products and services, and which operate in a favorable competitive environment
and regulatory climate.
GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND -- seeks long-term growth of
capital. The fund seeks this objective through a broadly diversified portfolio
of equity securities of U.S. issuers which are included in the Russell 2000
Index at the time of investment.
J.P. MORGAN SMALL COMPANY PORTFOLIO -- seeks to provide high total return from a
portfolio of small company stocks.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
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FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
GOLDMAN SACHS VIT CAPITAL GROWTH FUND -- seeks long-term growth of capital.
CORE EQUITY FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Core Equity Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
FIDELITY VIP II CONTRAFUND PORTFOLIO -- seeks long-term capital appreciation.
The Portfolio invests primarily in common stocks of domestic and foreign issuers
whose value is not fully recognized by the public. The Portfolio may invest in
either growth stocks or value stocks or both.
GOLDMAN SACHS VIT CORE LARGE CAP GROWTH FUND -- seeks long-term growth of
capital. The fund seeks this objective through a broadly diversified portfolio
of equity securities of U.S. issuers that are expected to have better prospects
for earnings growth than the growth rate of the general domestic economy.
Dividend income is a secondary consideration.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.
DEUTSCHE VIT EQUITY 500 INDEX -- seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's Composite Stock Price Index
(the "S&P Index"), which emphasizes stocks of large U.S. Companies.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.
PIMCO TOTAL RETURN BOND PORTFOLIO II -- seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
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SELECT INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of
fixed income securities with the objective of seeking as high a level of total
return (including both income and capital appreciation) as is consistent with
prudent investment management.
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the Fixed Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. If the 1940 Act or any rules
thereunder should be amended, or if the present interpretation of the 1940 Act
or such rules should change, and as a result the Company determines that it is
permitted to vote shares in its own right, whether or not such shares are
attributable to the Certificates, the Company reserves the right to do so. Each
person having a voting interest will be provided with proxy materials of the
respective Underlying Fund, together with an appropriate form with which to give
voting instructions to the Company. Shares held in each Sub-Account for which no
timely instructions are received will be voted in proportion to the instructions
that are received. The Company will also vote shares held in the Separate
Account that it owns and which are not attributable to Certificates in the same
proportion.
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the Fund shares be voted so
as (1) to cause a change in the subclassification or investment objective of one
or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, the Company may disregard voting
instructions that are in favor of any change in the investment policies or in
any investment adviser or principal underwriter if the change has been initiated
by Certificate Owners or the Trustees. Our disapproval of any such change must
be reasonable and, in the case of a change in investment policies or investment
adviser, based on a good faith determination that such change would be contrary
to state law or otherwise is inappropriate in light of the objectives and
purposes of the Funds. In the event we do disregard voting instructions, a
summary of and the reasons for that action will be included in the next periodic
report to Certificate Owners.
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ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund, or in shares of another investment company having a specified
investment objective.
Subject to applicable law and any required SEC approval, the Company may, in its
sole discretion, establish new Sub-Accounts or eliminate one or more
Sub-Accounts if marketing needs, tax considerations or investment conditions
warrant. Any new Sub-Accounts may be made available to existing Certificate
Owners on a basis to be determined by the Company.
If the Company deems it to be in the best interest of Certificate Owners, and
subject to any approvals that may be required under applicable law, the Separate
Account or any Sub-Accounts may be operated as a management company under the
1940 Act, may be deregistered under the 1940 Act if registration is no longer
required, or may be combined with other Sub-Accounts or other separate accounts
of the Company.
Shares of the Funds of AIT are also issued to separate accounts of the Company
and its affiliates which issue variable annuity contracts ("mixed funding").
Shares of the portfolios of the Underlying Funds are also issued to variable
annuity and variable life separate accounts of other unaffiliated insurance
companies ("mixed and shared funding"). It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
contract owners or variable annuity contract owners. Although the Company and
the Underlying Funds do not currently foresee any such disadvantages, the
Company and the respective Trustees intend to monitor events in order to
identify any material conflicts between such contract owners and to determine
what action, if any, should be taken in response thereto. If the Trustees were
to conclude that separate funds should be established for variable life and
variable annuity separate accounts, the Company will bear the expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement, change the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes.
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THE CERTIFICATE
The Certificates may be issued either as certificates under a group policy or as
individual policies to members of a particular group. The Insured is generally
an individual who is an employee or a member of a group. Under a group policy,
the owner of the Certificates is generally an employer or a trustee of a trust.
However, the Certificates may be owned either by the employer/trustee or by
individuals.
The Certificate may be issued with an Insured Term Rider. Depending on your
circumstances, it may be less costly to purchase more insurance coverage under
the Insured Term Rider than under the Base Amount of insurance coverage.
ENROLLMENT FORM FOR A CERTIFICATE
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
At the time of enrollment, the Owner and Insured, if applicable, will generally
complete an enrollment form. Upon payment of the initial premium, temporary
insurance will be provided. Issuance of the continuing insurance coverage
provided under the Certificate is dependent upon completion of the underwriting
requirements, payment of sufficient initial premium, and delivery of the
Certificate while the Insured is still living.
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the Fixed Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the Fixed Account will be credited with interest not
later than the date of receipt of the premium at the Principal Office. IF THE
CERTIFICATE IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
If your Certificate provides for a full refund of the initial payment under its
"Right to Examine Certificate" provision (as may be required in your state),
upon issuance all Certificate Value in the Fixed Account that you initially
designated to go to the Separate Account will be transferred to the Sub-Account
investing in the Money Market Fund of AIT. All Certificate Value will be
allocated as you have chosen not later than the expiration of the period during
which you may exercise the "Right to Examine Certificate" provision. See "Free
Look Period," below.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by returning it to us or to one of our representatives on or before
the tenth day (or such later date as required in your state) after you receive
the Certificate. If your Certificate was purchased in New York as a replacement
for an existing policy, you after the right to cancel for up to 60 days after
your receive the Certificate. When you return the Certificate, the Company will
mail a refund to you within seven days. The refund of any premium paid by check
may be delayed until the check has cleared your bank. If the Certificate
provides for a full refund of the initial premium under its "Right-to-Examine
Certificate" provision as required in your state, your refund will be the
greater of (a) your entire premium, or (b) the Certificate Value plus deductions
under the Certificate or by the Underlying Funds for taxes, charges or fees. If
the Certificate does not provide for a full refund of the
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initial premium, you will receive the Certificate Value in the Separate Account,
plus premiums paid (including fees and charges), minus the amounts allocated to
the Separate Account, plus the fees and charges imposed on amounts in the
Separate Account.
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, or (b) 10 days after you receive the new specifications pages issued for
the increase. Upon canceling the increase, you will receive a credit to the
Certificate Value of charges which would not have been deducted but for the
increase. The amount to be credited will be refunded if you so request.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the Fixed
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the Fixed Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the Fixed Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the Fixed Account.
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or Fixed
Account as of date of receipt at the Principal Office.
You may establish a schedule of planned premiums that will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $400.
Premiums are not limited as to frequency and number. However, you may be
required to provide evidence of insurability as a condition to our accepting any
payment that would increase the Insurance Amount at Risk (the Death Benefit less
the Certificate Value). If evidence of insurability is required, the Company
will return the payment to you and if your payment exceeds our maximum limit
(defined below) the Company may not accept any additional payments which would
increase the Insurance Amount at Risk and shall not provide any additional death
benefit until (1) evidence of insurability for the Insured has been received by
the Company and (2) the Company has notified you that the Insured is in a
satisfactory underwriting class. You may then
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make payments that increase the Insurance Amount at Risk for 60 days (but not
later than the Final Payment Date) following the date of such notification by
the Company.
No premium payment may be less than $400 without the Company's consent.
Moreover, premium payments must be sufficient to cover the next Monthly
Deduction plus loan interest accrued, or the Certificate may lapse. See
CERTIFICATE TERMINATION AND REINSTATEMENT.
The Company may limit the maximum payment received in any certificate year but
in no event will the limit be less than the maximum premium shown in the
Certificate. In no event may the total of all premiums paid exceed the current
maximum premium limitations set forth in the Certificate. These maximum premium
limitations will change whenever there is any change in the Face Amount, the
addition or deletion of a rider, or a change in the Death Benefit Option.
If a premium is paid which would result in total premiums exceeding the current
maximum premium limitations under Federal tax laws, the Company may only accept
that portion of the premiums which shall make total premiums equal the maximum.
Any part of the premiums in excess of that amount will be returned and no
further premiums will be accepted until allowed by the current maximum premium
limitation prescribed by Internal Revenue Service ("IRS") rules. Notwithstanding
the current maximum premium limitations, however, the Company will accept a
premium which is needed in order to prevent a lapse of the Certificate during a
Certificate year. See CERTIFICATE TERMINATION AND REINSTATEMENT.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the Fixed Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%.
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. If allocation changes by telephone are elected by
the Certificate Owner, a properly completed authorization form must be on file
before telephone requests will be honored. The policy of the Company and its
agents and affiliates is that they will not be responsible for losses resulting
from acting upon telephone requests reasonably believed to be genuine. The
Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable for
any losses due to unauthorized or fraudulent instructions. Such procedures may
include, among other things, requiring some form of personal identification
prior to acting upon instructions received by telephone.
An allocation change will be effective as of the date of receipt of the notice
at the Principal Office. No charge is currently imposed for changing premium
allocation instructions. The Company reserves the right to impose such a charge
in the future, but guarantees that the charge will not exceed $25.
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the Fixed
Account. However, the Certificate Value held in the
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Fixed Account to secure a Certificate loan may not be transferred. The Company
may at any time revoke, modify, or limit the transfer privilege.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Transfers to and from the Fixed Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the Fixed Account; and
(b) The amount transferred from the Fixed Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Certificate.
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge. Any transfers made with respect to a conversion privilege, Certificate
loan or material change in investment policy will not count towards the twelve
free transfers.
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of AIT to one or more of the other Sub-Accounts ("Dollar Cost
Averaging Option"), or (b) to automatically reallocate Certificate Value among
the Sub-Accounts ("Automatic Rebalancing Option"). Automatic transfers may be
made on a monthly, bimonthly, quarterly, semiannual or annual schedule.
Generally, all transfers will be processed on the 15th of each scheduled month.
However, if the 15th is not a business day or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The Dollar
Cost Averaging Option and the Automatic Rebalancing Option may not be in effect
at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the Fixed Account, and (4)
the maximum amount that may be transferred each time from the Fixed Account.
The Certificates are not designed for use by individuals, professional market
timing organizations, or other entities that do "market timing," programmed
transfers, or frequent transfers. These and similar activities may be disruptive
to the Underlying Funds, and may adversely affect an Underlying Fund's ability
to invest effectively in accordance with its investment objectives and policies.
If it appears that there is a pattern of transfers that coincides with a market
timing strategy and/or that is disruptive to the Underlying Funds, the Company
reserves the right to refuse transfers or to take other action to prevent or
limit the use of such activities.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a Guideline Minimum Death Benefit in relation to cash
value for a Certificate to qualify as life insurance. Under current federal tax
law, either the Guideline Premium test or the Cash Value
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Accumulation test can be used to determine if the Certificate complies with the
definition of "life insurance" in Section 7702 of the Code. At the time of
application, the Employer may elect either of the tests.
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa.
The Cash Value Accumulation test requires that the Death Benefit must be
sufficient so that the Certificate Value, as defined in Section 7702, does not
at any time exceed the net single premium required to fund the future benefits
under the Certificate. In the event the maximum premium limit applies, we
reserve the right to obtain evidence of insurability which is satisfactory to us
as a condition to accepting excess premium. IF THE CASH VALUE ACCUMULATION TEST
IS CHOSEN BY THE EMPLOYER, ONLY DEATH BENEFIT OPTION 3 WILL APPLY. DEATH
BENEFITS OPTION 1 AND OPTION 2 ARE NOT AVAILABLE UNDER THE CASH VALUE
ACCUMULATION TEST.
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the
Guideline Minimum Death Benefit relative to the Certificate Value are different.
Required increases in the Guideline Minimum Death Benefit due to growth in
Certificate Value will generally be greater under the Cash Value Accumulation
test than under the Guideline Premium test. Applicants for a Policy should
consult a qualified tax adviser in choosing a Death Benefit election.
OPTION 1 -- LEVEL DEATH BENEFIT
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Guideline Minimum Death Benefit, as set forth in the table below. Under
Option 1, the Death Benefit will remain level unless the Guideline Minimum Death
Benefit is greater than the Face Amount, in which case the Death Benefit will
vary as the Certificate Value varies. Option 1 will offer the best opportunity
for the Certificate Value under a Certificate to increase without increasing the
Death Benefit as quickly as it might under the other options. The Death Benefit
will never go below the Face Amount.
OPTION 2 -- ADJUSTABLE DEATH BENEFIT
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Guideline Minimum Death Benefit, as set forth
in the table below. The Death Benefit will, therefore, vary as the Certificate
Value changes, but will never be less than the Face Amount. Option 2 will offer
the best opportunity for the Certificate Owner who would like to have an
increasing Death Benefit as early as possible. The Death Benefit will increase
whenever there is an increase in the Certificate Value, and will decrease
whenever there is a decrease in the Certificate Value, but will never go below
the Face Amount.
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the Certificate at the "seven-pay"
limit for the full seven years. When the Certificate Value multiplied by the
applicable Death Benefit Factor exceeds the Face Amount, the Death Benefit will
increase whenever there is an increase in the Certificate Value, and will
decrease whenever there is a decrease in the Certificate Value, but will never
go below the Face Amount.
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DEATH PROCEEDS
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; minus (b) any Outstanding Loan, any partial withdrawals, and any Monthly
Deductions due and unpaid through the Certificate month in which the Insured
dies. After the Final Premium Payment Date, the Death Proceeds equal the
Surrender Value of the Certificate. The amount of Death Proceeds payable will be
determined as of the date the Company receives due proof of the Insured's death
for Option 2 and date of death for Options 1 and 3.
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
GUIDELINE MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
The Guideline Minimum Death Benefit under Option 1 or Option 2 is equal to a
percentage of the Certificate Value as set forth below. The Guideline Minimum
Death Benefit is determined in accordance with the Code regulations to ensure
that the Certificate qualifies as a life insurance contract and that the
insurance proceeds may be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM DEATH BENEFIT TABLE
(Option 1 and Option 2)
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Certificate Value
---------------- -----------------
<S> <C>
40 and under........................................... 250%
45..................................................... 215%
50..................................................... 185%
55..................................................... 150%
60..................................................... 130%
65..................................................... 120%
70..................................................... 115%
75..................................................... 105%
80..................................................... 105%
85..................................................... 105%
90..................................................... 105%
95 and above........................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
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will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value." If you desire to have
premium payments and investment performance reflected in the amount of the Death
Benefit, you should choose Option 2. If you desire premium payments and
investment performance reflected to the maximum extent in the Certificate Value,
you should select Option 1.
CHANGE IN DEATH BENEFIT OPTION
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of the request. No charges will be imposed on changes in Death Benefit Options.
IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Guideline Minimum Death
Benefit). The cost of insurance may be higher or lower than it otherwise would
have been since any increases or decreases in Certificate Value will,
respectively, reduce or increase the Insurance Amount at Risk under Option 1.
Assuming a positive net investment return with respect to any amounts in the
Separate Account, changing the Death Benefit Option from Option 2 to Option 1
will reduce the Insurance Amount at Risk and, therefore, the cost of insurance
charge for all subsequent Monthly Deductions, compared to what such charge would
have been if no such change were made.
If the Death Benefit Option is changed from Option 1 to Option 2, the Face
Amount will be decreased to equal the Death Benefit less the Certificate Value
on the effective date of the change. This change may not be made if it would
result in a Face Amount less than $10,000. A change from Option 1 to Option 2
will not alter the amount of the Death Benefit at the time of the change, but
will affect the determination of the Death Benefit from that point on. Because
the Certificate Value will be added to the new specified Face Amount, the Death
Benefit will vary with the Certificate Value. Thus, under Option 2, the
Insurance Amount at Risk will always equal the Face Amount unless the Guideline
Minimum Death Benefit is in effect. The cost of insurance may also be higher or
lower than it otherwise would have been without the change in Death Benefit
Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Certificate
Value."
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. If the Insured Term Rider is in effect, any increase will be under the
Insured Term Rider. Any increase or decrease in the specified Face Amount
requested by you will generally become effective on the Monthly Processing Date
on or next following the date of receipt of the request at the Principal Office
or, if Evidence of Insurability is required, the date of approval of the
request.
INCREASES
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured may also be required
whenever the Face Amount is increased. A request for an increase
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in the Face Amount may not be less than an amount determined by the Company.
This amount varies by group but in no event will this amount exceed $10,000. You
may not increase the Face Amount after the Insured reaches Age 85. An increase
must be accompanied by an additional premium if the Certificate Value is less
than the sum of three Monthly Deductions. The effective date of the increase
will generally be the first Monthly Processing Date on or following the date all
of the conditions for the increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and (2)
during the first 24 months following the increase, to transfer any or all
Certificate Value to the Fixed Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
DECREASES
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the decrease may be limited or Certificate Value may be returned to the
Certificate Owner (at your election) to the extent necessary to meet the
requirements. A return of Certificate Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Base Amount.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the Fixed Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Outstanding Loan). See THE
CERTIFICATE --"Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined.
Certificate Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the Fixed Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Certificate.
CALCULATION OF CERTIFICATE VALUE
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the underwriting period when premiums
are held in the Fixed Account (before being transferred to the Separate Account;
see THE CERTIFICATE -- "Enrollment Form for a Certificate") less any Monthly
Deductions due. On each Valuation Date after the Date of Issue the Certificate
Value will be:
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(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
determined for each Sub-Account by multiplying the value of a Unit in that
Sub-Account on that date by the number of such Units allocated to the
Certificate; PLUS
(2) the value in the Fixed Account (including any amounts transferred to the
Fixed Account with respect to a loan).
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the Fixed Account, if any.
THE UNIT
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any; and
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period.
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor.
Allocations to the Fixed Account are not converted into Units, but are credited
interest at a rate periodically set by the Company. See MORE INFORMATION ABOUT
THE FIXED ACCOUNT.
PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
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<PAGE>
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost, if any, of optional insurance benefits added by rider will be
deducted as part of the Monthly Deduction. See CHARGES AND DEDUCTIONS --
"Monthly Deduction from Certificate Value."
SURRENDER
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less any Outstanding Loan. The
Surrender Value will be calculated as of the Valuation Date on which a Written
Request for surrender and the Certificate are received at the Principal Office.
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
For important tax considerations that may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PARTIAL WITHDRAWAL
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the Fixed Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the partial withdrawal
transaction charge as described under CHARGES AND DEDUCTIONS -- "Transaction
Charge on Partial Withdrawal." The Company will normally pay the amount of the
partial withdrawal within seven days following the Company's receipt of the
partial withdrawal request, but the Company may delay payment under certain
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments." For important tax consequences which may result from partial
withdrawals, see FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
total assets under management, nature of relationship among individual insureds,
the expected persistency of individual policies and anticipated aggregate
premium payments. From time to time the
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<PAGE>
Company may modify both the amounts and criteria for reductions, which will not
be unfairly discriminatory against any person.
The Certificate may be issued with an Insured Term Rider. Depending on your
circumstances, it may be less costly to purchase more insurance coverage under
the Insured Term Rider than under the Base Amount of insurance coverage. The
current cost of insurance charges for the insurance coverage provided by the
Insured Term Rider are equal to or lower than for the insurance coverage
provided by the Base Amount. In addition, the Monthly Expense Charge does not
apply to insurance coverage provided by the Insured Term Rider.
Upon full surrender of a group Policy within the first three Policy years, in
certain situations the Company will, upon written request, refund a percentage
of the portion of the previously paid Premium Expense Charge that exceeded our
local, state and federal tax expenses. 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.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
under Section 848 of the Code for deferred acquisition cost, and for
distribution expenses related to the Certificates. Upon request, the Company may
permit all or part of the Premium Expense Charge to be deducted as part of the
monthly deduction.
STATE PREMIUM TAXES. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The Company
guarantees that the charge for premium taxes will not exceed 10%. The premium
tax charge may change when either the applicable jurisdiction changes or the tax
rate within the applicable jurisdiction changes. The Company should be notified
of any change in address of the Insured as soon as possible.
DAC TAX. Section 848 of the Code requires insurance companies to capitalize
certain specified policy acquisition costs and defer their deduction in
determining the insurer's tax liability. This is known as the "DAC tax." The
Company deducts a charge for the DAC tax that may range from zero up to 2% (up
to 4% for certain corporate or trust-owned policies described below) of
premiums, depending on the group to which the Policy is issued.
Over time, the Company will realize an economic benefit from the tax deductions
it receives as the capitalized policy acquisition costs are amortized. If
Certificates are issued under a corporate or trust-owned life insurance policy
("COLI Policy"), at the request of the Policyholder the Company may "pass
through" this economic benefit to the Policyholder. Under the pass through, the
DAC tax will be higher (up to 4%) than it would be without the pass through (up
to 2%). The DAC tax is charged on each premium payment and each DAC tax "load"
is tracked separately. Over a period (currently 11 years) that reflects the
amortization provisions of Section 848 of the Code, on each Certificate
anniversary the Company will refund a portion of each DAC tax load. The amount
of the refund is a percentage of each load, based on the number of Certificate
anniversaries after the respective premium payment was made. If a Certificate is
surrendered or if the Insured dies, any remaining load will be refunded to the
Policyholder.
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DISTRIBUTION EXPENSES. The charge for distribution expenses may range from zero
to 10%. The distribution charge may vary, depending upon such factors, for
example, as the type of the benefit plan, average number of participants,
average Face Amount of the Certificates, anticipated average annual premiums,
and the actual distribution expenses incurred by the Company.
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction may include charges
for the following:
- The cost of insurance. The cost of insurance rates will vary with the age
and underwriting class of the Insured.
- Certificate administrative expenses. The charge may be up to $10 monthly,
depending on the group to which the Policy is issued.
- For the first five Certificate years, a Monthly Expense Charge to
reimburse the Company for underwriting and acquisition costs. The charge
is equal to a specified amount that varies with the Insured's Age and
underwriting class for each $1,000 of the Certificate's Base Amount on the
Date of Issue. For more information, see APPENDIX D -- MONTHLY EXPENSE
CHARGE TABLE.
- Separate Account administrative expenses. The Separate Account
administrative charge may continue for up to 10 Certificate years and may
be up to 0.25% of Certificate Value in each Sub-Account, depending on the
group to which the Policy was issued.
- Mortality and expense risks. The mortality and expense risk charge may be
up to 0.90% of Certificate Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses, the monthly expense charge, the
mortality and expense risk charge, and the charge, if any, for the cost of
additional benefits provided by rider will be deducted. If no allocation is
specified, the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge based on
the prior month's sub-account value. In the event that a charge is greater than
the value of the Sub-Account to which it relates on a Monthly Processing Date,
the Company will make a Pro-Rata Allocation of the unpaid balance.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. After the Final Premium Payment Date,
a deduction for mortality and expense risk charges will continue to be assessed
monthly. No other Monthly Deductions will be made on or after the Final Premium
Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Base Amount and Insured Term
Rider, if any, and for each subsequent increase in the Base Amount and Insured
Term Rider. Because the cost of insurance depends upon a number of variables, it
can vary from month to month and from group to group. Generally, the current
cost of insurance for the Base Amount will be higher than the cost of insurance
under an Insured Term Rider.
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COST OF INSURANCE RATES. The Certificates are sold to eligible individuals who
are members of a non-qualified benefit plan having a minimum, depending on the
group, of five or more members. A portion of the initial Face Amount may be
issued on a fully underwritten, guaranteed or simplified underwriting basis, and
may vary based on characteristics within a group. The determination of the
Underwriting Class for the guaranteed or simplified issue portion will, in part,
be based on: the type of group; the purpose for which the Certificates are
purchased; the number of persons eligible to participate in the plan; expected
percentage of eligible persons participating in the plan; aggregate premiums
paid; and the amount of guaranteed or simplified underwriting insurance to be
issued.
Cost of insurance rates are based on an appropriate rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable. The cost of insurance rates are
determined at the beginning of each Certificate year for the initial Base Amount
of insurance coverage and the initial amount of the Insured Term Rider, if any.
The cost of insurance rates for an increase in the initial Base Amount or the
initial amount of the Insured Term Rider, if any, are determined annually on the
anniversary of the effective date of each increase or rider. The cost of
insurance rates generally increase as the Insured's Age increases. Generally,
the cost of insurance rates for insurance coverage under the Base Amount are
higher than for insurance coverage under the Insured Term Rider.
The actual monthly cost of insurance rates will be based on the Company's
expectations as to future expenses and mortality experience. They will not,
however, be greater than the guaranteed cost of insurance rates set forth in the
Certificate. These guaranteed rates are based on the 1980 Commissioners Standard
Ordinary Mortality Tables (Age Last Birthday) (Male, Female or Unisex Table B,
Smoker, Non-smoker or Uni-smoker) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and
non-smokers. Any change in the cost of insurance rates will apply to all persons
in the group of the same insuring Age and Underwriting Class whose Certificates
have been in force for the same length of time.
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into the following Underwriting Classes:
preferred, standard, substandard, guaranteed issue and simplified issue, each
with separate ratings for the Base Amount and for the Insured Term Rider. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will generally have a lower cost of insurance than an Insured in a standard
Underwriting Class who, in turn, will have a lower cost of insurance than an
Insured in a substandard Underwriting Class with a higher mortality risk. The
Underwriting Classes may be divided into two categories or aggregated: smokers
and non-smokers. Non-smoking Insureds will incur lower cost of insurance rates
than Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
The cost of insurance rates are determined separately for the initial Face
Amount and for the amount of any increase in the Face Amount. For each increase
in the Face Amount you request, at a time when the Insured is in a less
favorable Underwriting Class than previously, a correspondingly higher cost of
insurance rate will apply only to that portion of the Insurance Amount at Risk
for the increase. For the initial Face Amount and any prior increases, the
Company will use the Underwriting Class previously applicable. On the other
hand, if the Insured's Underwriting Class improves on an increase, the lower
cost of insurance rate generally will apply to the entire Insurance Amount at
Risk.
GROUP EXPERIENCE RATING. If Certificates are issued under a corporate or
trust-owned life insurance policy ("COLI Policy") covering at least 500
Insureds, at the request of the Policyholder the COLI Policy may be issued on
the basis of group experience rating. The Company will establish a target for
the mortality reserve that is equal to a percentage of the current year's cost
of insurance charges. If the group has favorable mortality experience (actual
claims are less than expected), the mortality reserve may eventually exceed the
target reserve. At the end of any experience period, if the mortality reserve
exceeds the target reserve, at the
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Policyholder's request, an experience credit will be paid to the Policyholder
from the mortality reserve. At the end of each experience period, the cost of
insurance charges for the group may be adjusted prospectively (for the next
experience period), but will never exceed the guaranteed cost of insurance
charges.
If the number of Insureds under the COLI Policy falls below 100, the experience
rating of the group will cease. Any positive reserve will be distributed to the
Policyholder over an 18-month period in order to cover any incurred but not yet
reported claims.
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
MONTHLY EXPENSE CHARGE
The Monthly Expense Charge may be charged on the monthly processing date for the
first five years after issuance of the Certificate. This charge will be used to
reimburse the Company for underwriting and acquisition costs. The charge is
equal to a specified amount that varies based on age, and the Insured's
Underwriting class (Smoker/Non-Smoker) for each $1,000 of the Certificate's Base
Amount. The maximum rate per $1000 of Base Amount, considering all possible
combinations of Ages and Underwriting Classes, is $0.2175 for an Insured who Age
65 and a smoker. For more information, see APPENDIX D -- MONTHLY EXPENSE CHARGE
TABLE.
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. If the charge for mortality and expense risks is
not sufficient to cover actual mortality experience and expenses, the Company
will absorb the losses. If costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current profit to the Company, such profit will be available for use by the
Company for, among other things, the payment of distribution, sales and other
expenses. Since mortality and expense risks involve future contingencies that
are not subject to precise determination in advance, it is not feasible to
identify specifically the portion of the charge that is applicable to each.
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CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Units of the Sub-Accounts will reflect the investment advisory fee and other
expenses incurred by the Underlying Funds. The prospectuses and Statements of
Additional Information of the Underlying Funds contain additional information
concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
TRANSACTION CHARGE ON PARTIAL WITHDRAWAL
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of $25 or 2% of the amount withdrawn,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge. The transaction fee applies to all partial withdrawals.
TRANSFER CHARGES
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE
CERTIFICATE --"Transfer Privilege."
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund and Government Bond Fund of AIT, respectively, to one or more of the
other Sub-Accounts, or (b) to reallocate Certificate Value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve free transfers allowed in each Certificate year. Each subsequent
automatic transfer is without charge and does not reduce the remaining number of
transfers which may be made without charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the Fixed
Account will be free of charge, and in addition to the twelve free transfers in
a Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and
CERTIFICATE LOANS.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing face amount, for changing the allocation of any
Monthly Deductions among the various Sub-Accounts, or for a projection of
values.
CERTIFICATE LOANS
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. The Loan
Value is 90% of an amount equal to Certificate Value. There is no minimum limit
on the amount of the loan. The loan amount will normally be paid within seven
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days after the Company receives the loan request at its Principal Office, but
the Company may delay payments under certain circumstances. See OTHER
CERTIFICATE PROVISIONS -- "Postponement of Payments."
A Certificate loan may be allocated among the Fixed Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the Fixed Account, and
the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN INTEREST CHARGED
As long as the Certificate is in force, Certificate Value in the Fixed Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 4.00% per year. The current credited rate is 4.0%. NO
ADDITIONAL INTEREST WILL BE CREDITED TO SUCH CERTIFICATE VALUE.
Interest accrues daily, and is payable in arrears at the annual rate of 4.9%,
guaranteed not to be greater than 5.5%. Interest is due and payable at the end
of each Certificate year or on a pro-rata basis for such shorter period as the
loan may exist. Interest not paid when due will be added to the loan amount and
bear interest at the same rate. After the due and unpaid interest is added to
the loan amount, if the new loan amount exceeds the Certificate Value in the
Fixed Account, the Company will transfer Certificate Value equal to that excess
loan amount from the Certificate Value in each Sub-Account to the Fixed Account
as security for the excess loan amount. The Company will allocate the amount
transferred among the Sub-Accounts in the same proportion that the Certificate
Value in each Sub-Account bears to the total Certificate Value in all Sub-
Accounts.
PREFERRED LOAN OPTION
A preferred loan option is automatically included under the Certificate if
approved in the state. You may change a preferred loan to a non-preferred loan
at any time upon written request. If this option has been included, after the
tenth Certificate anniversary Certificate Value in the Fixed Account equal to
the loan amount will be credited with interest at an effective annual yield of
at least 4.0%. Certificate loans will bear interest at a fixed rate of 4.0%,
guaranteed not to be greater than 4.5%. The Company's current practice is to
credit a rate of interest equal to the rate being charged for the preferred
loan.
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Certificate. Consult a qualified tax
adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT
AVAILABLE IN ALL STATES.
REPAYMENT OF OUTSTANDING LOAN
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of any Outstanding Loan, the portion of the Certificate Value that is
in the Fixed Account securing the Outstanding Loan repaid will be allocated to
the various Accounts and increase the Certificate Value in such Accounts in
accordance with your instructions. If you do not make a repayment allocation,
the Company will allocate Certificate Value in accordance with your most recent
premium allocation instructions; provided, however, that loan repayments
allocated to the Separate Account cannot exceed Certificate Value previously
transferred from the Separate Account to secure the Outstanding Loan.
If an Outstanding Loan exceeds the Certificate Value, the Certificate will
terminate. A notice of such pending termination will be mailed to the last known
address of you and any assignee. If you do not make sufficient payment within 62
days after this notice is mailed, the Certificate will terminate with no value.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
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EFFECT OF CERTIFICATE LOANS
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the Fixed Account attributable to the loan.
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
CERTIFICATE TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Certificate to lapse
unless:
- the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued; or
- if an Outstanding Loan exceeds the Certificate Value.
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
REINSTATEMENT
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
- a written enrollment form for reinstatement,
- Evidence of Insurability; and
- a premium that, after the deduction of the premium expense charge, is
large enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
CERTIFICATE VALUE ON REINSTATEMENT
The Certificate Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Certificate increased by interest
from the date the payment was received at the Principal Office; plus
- an amount equal to the Certificate Value less any Outstanding Loan on the
date of default; minus
- the Monthly Deduction due on the date of reinstatement. You may reinstate
any Outstanding Loan outstanding on the date of default or foreclosure.
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OTHER CERTIFICATE PROVISIONS
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
CERTIFICATE OWNER
The Certificate Owner is named in the enrollment form or as subsequently
changed. The Certificate Owner is generally entitled to exercise all rights
under the Certificate while the Insured is alive, subject to the consent of any
irrevocable Beneficiary (the consent of a revocable Beneficiary is not
required). The consent of the Insured may be required when the Face Amount of
insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
ASSIGNMENT
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
INCONTESTABILITY
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Certificate,
without interest, less any Outstanding Loan and less any partial withdrawals. If
the Insured commits suicide, while sane or insane, within two years from the
effective date of any increase in the Death Benefit, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.
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AGE
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers may be postponed whenever: (1) the New York Stock Exchange is
closed other than customary weekend and holiday closings, or trading on the New
York Stock Exchange is restricted as determined by the SEC, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Certificate of
any amounts derived from the premiums paid by check may be delayed until such
time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
Fixed Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the Fixed Account, for
a period not to exceed six months.
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DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Warren E. Barnes
Vice President and Corporate Vice President (since 1996) and Corporate Controller
Controller (since 1998) of First Allmerica
Mark R. Colburn Director (since 2000) and Vice President (since 1992)
Director and Vice President of First Allmerica.
Charles F. Cronin Secretary and Counsel (since 2000) of First
Secretary and Counsel Allmerica; Counsel (since 1996) of First Allmerica;
Attorney (1991-1996) of Nutter, McClennen & Fish
J. Kendall Huber Director, Vice President and General Counsel of First
Director, Vice President and Allmerica (since 2000); Vice President (1999) of
General Counsel Promos Hotel Corporation; Vice President & Deputy
General Counsel (1998-1999) of Legg Mason, Inc.; Vice
President and Deputy General Counsel (1995-1998) of
USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Chief and Vice President (since 1991) of First Allmerica;
Investment Officer and Vice President (since 1998) of Allmerica
Financial Investment Management Services, Inc.; and
President (since 1995) and Director (since 1996) of
Allmerica Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
John F. O'Brien Director, President and Chief Executive Officer
Director and Chairman of the Board (since 1989) of First Allmerica; Director (since
1989) of Allmerica Investments, Inc.; and Director
and Chairman of the Board (since 1990) of Allmerica
Financial Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and
Director, Vice President, and Vice President and Treasurer (since 1993) of First
Chief Financial Officer Allmerica; Treasurer (since 1993) of Allmerica
Investments, Inc.; and Treasurer (since 1993) of
Allmerica Financial Investment Management
Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director, President and Chief of First Allmerica; President (since 1995) of
Executive Officer Allmerica Financial Life Insurance and Annuity
Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Director (since 1998) of The Hanover
Insurance Company; Chief Executive Officer (1996 to
1998) of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
</TABLE>
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<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------------------------ ----------------------------------------------
<S> <C>
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
Gregory D. Tranter Director and Vice President (since 2000) of First
Director and Vice President Allmerica; Vice President (since 1998) of The Hanover
Insurance Company; Vice President (1996-1998) of
Travelers Property & Casaulty; Director of Geico
Team (1983-1996) of Aetna Life & Casualty
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Certificates pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer and is
a member of the National Association of Securities Dealers ("NASD"). The
Certificates are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc. or of independent broker-dealers.
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issuance of a
Certificate or an increase in Face Amount, commissions may be up to 25% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.75% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the amount of earned commissions. General Agents may
also receive overriding commissions, which will not exceed 2.5% of first-year,
or 4% of renewal premiums.
To the extent permitted by NASD rules, promotional incentives or payments may
also be provided to broker-dealers based on sales volumes, the assumption of
wholesaling functions or other sales related criteria. Other payments may be
made for other services that do not directly involve the sales of the
Certificates. These services may include the recruitment and training of
personnel, production of promotional literature, and similar services. The
Company intends to recoup the commissions and other sales expenses through a
combination of a portion of the premium expense charge and the investment
earnings on amounts allocated to accumulate on a fixed basis in excess of the
interest credited on fixed accumulations by the Company.
REPORTS
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the Fixed Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you. The annual
statement will summarize all of the above transactions and deductions of charges
during the Certificate year. It will also set forth the status of the Death
Proceeds, Certificate Value, Surrender Value, amounts in the Sub-Accounts and
Fixed Account, and any Certificate loan(s). The Owner should review the
information in all statements carefully. All errors or corrections must be
reported to the Company immediately to assure proper crediting to the
Certificate. The Company will assume that all transactions are
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<PAGE>
accurately reported on confirmation statements and quarterly/annual statements
unless the Owner notifies the Principal Office in writing within 30 days after
receipt of the statement. In addition, you will be sent periodic reports
containing financial statements and other information for the Separate Account
and the Underlying Investment Companies as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company and
Allmerica Investments, Inc. are not involved in any litigation that is of
material importance in relation to their total assets or that relates to the
Separate Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account. Based on these expectations,
no charge is made for federal income taxes which may be attributable to the
Separate Account.
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
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<PAGE>
TAXATION OF THE CERTIFICATES
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See "Modified Endowment Contracts."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
CERTIFICATE LOANS
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may convert your
preferred loan to a non-preferred loan. However, it is possible that,
notwithstanding the conversion, some or all of the loan could be treated as a
taxable withdrawal from the Certificate.
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible.
Generally, no tax deduction for interest is allowed on policy or certificate
loans, if the insured is an officer or employee of, or is financially interested
in, any business carried on by the taxpayer. There is an exception to this rule
which permits a deduction for interest on loans up to $50,000 related to any
business-owned policies or certificates covering officers or 20-percent owners,
up to a maximum equal to the greater of (1) five individuals, or (2) the lesser
of (a) 5% of the total number of officers and employees of the corporation, or
(b) 20 individuals.
47
<PAGE>
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level annual premiums. In addition, if benefits are reduced
at anytime during the life of the Certificate, there may be adverse tax
consequences. Please consult your tax adviser.
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any calendar period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
MORE INFORMATION ABOUT THE FIXED ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the Fixed Account. The Fixed Account is an investment option that is
funded by the general account of the Company. Because of exemption and
exclusionary provisions in the securities law, any amount in the general account
of the Company is not generally subject to regulation under the provisions of
the 1933 Act or the 1940 Act. Accordingly, the disclosures in this Section have
not been reviewed by the SEC. Disclosures regarding the fixed portion of the
Certificate, the Fixed Account, and the general account may, however, be subject
to certain generally applicable provisions of the Federal Securities Laws
concerning the accuracy and completeness of statements made in prospectuses.
GENERAL DESCRIPTION
The general account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the Fixed Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the Fixed Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the Fixed Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the Fixed Account does not entitle you to
share in the investment experience of the Fixed Account or the general account.
48
<PAGE>
FIXED ACCOUNT VALUE AND CERTIFICATE LOANS
The Company bears the full investment risk for amounts allocated to the Fixed
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the Fixed Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium until the next Certificate
anniversary, unless the Certificate Value associated with the premium becomes
security for a Certificate loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF
INTEREST ON NET PREMIUM, ANY INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE
FIXED ACCOUNT IN EXCESS OF THE GUARANTEED MINIMUM RATE PER YEAR WILL BE
DETERMINED IN THE SOLE DISCRETION OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES
THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the Fixed Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to an Outstanding Loan. The Company guarantees that, on each
Monthly Processing Date, the Certificate Value in the Fixed Account will be the
amount of the Net Premiums allocated or Certificate Value transferred to the
Fixed Account, plus interest at the Guaranteed Minimum Rate, plus any excess
interest which the Company credits, less the sum of all Certificate charges
allocable to the Fixed Account and any amounts deducted from the Fixed Account
in connection with loans, partial withdrawals, surrenders or transfers.
Certificate loans may also be made from the Certificate Value in the Fixed
Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the Fixed Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the Fixed Account used to pay premiums on policies with the Company will
not be delayed.
THE CERTIFICATE
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the Fixed Account, see the Certificate
itself.
TRANSFERS, SURRENDERS, AND PARTIAL WITHDRAWALS
Partial withdrawals are made on a last-in/first-out basis from Certificate Value
allocated to the Fixed Account. This means that the last payments allocated to
Fixed Account will be withdrawn first.
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, and the financial
statements for Group VEL Account of the Company as of December 31, 1999 and for
the periods indicated, included in this Prospectus constituting part of this
Registration Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
49
<PAGE>
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Separate Account are included
in this Prospectus, beginning immediately after the Appendices. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account.
50
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. The following supplemental benefit may be
available for issue under the Certificates for an additional charge.
INSURED TERM RIDER
This rider provides an additional term insurance benefit for the primary
insured.
THIS RIDER MAY NOT BE AVAILABLE IN ALL STATES.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options then offered by the
Company. If you do not make an election, the Company will pay the benefits in a
single sum. A certificate will be provided to the payee describing the payment
option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that would otherwise by deducted from the Death Benefit.
The amounts payable under a payment option are paid from the Fixed Account.
These amounts are not based on the investment experience of the Separate
Account.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
B-1
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Certificate's Sum Insured and
Certificate Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Certificate issued to a male, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, a Certificate issued
to a male, Age 40, under a standard Premium Class and qualifying for the
non-smoker discount and a male, Age 45, under a standard Premium Class and
qualifying for the non-smoker discount. The tables illustrate the guaranteed
cost of insurance rates and the current cost of insurance rates as presently in
effect.
The tables illustrate the Certificate Values that would result based upon the
assumptions that no Certificate loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Certificate year (so that no transaction or transfer charges have been
incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown, and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6% and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the premiums paid
were invested each year to earn interest (after taxes) at 5% compounded
annually. The Certificate Values and Death Proceeds would be different from
those shown if the gross annual investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated above or below such averages for
individual Certificate years. The values would also be different depending on
the allocation of a Certificate's total Certificate Value among the Sub-Accounts
of the Separate Account, if the actual rates of return averaged 0%, 6% or 12%,
but the rates of each Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Certificate Values take into
account the deduction from premium for the premium expense charge, the Monthly
Deductions from Certificate Value, and the monthly charge for mortality and
expense risks. In the Current Cost of Insurance Charges tables, the charge for
mortality and expense risks is equivalent to an effective annual rate of 0.50%
of the average monthly value of the assets in the Separate Account attributable
to the Certificates. In the Guaranteed Cost of Insurance Charges table, the
Separate Account charge for mortality and expense risks is illustrated at 0.90%.
There is also a separate account administrative charge of 0.25% for 10 years in
the Guaranteed tables.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.90% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary and, in 1999, ranged from an
annual rate of 0.29% to an annual rate of 1.92% of average daily net assets. The
fees and expenses associated with the Certificate may be more or less than 0.90%
in the aggregate, depending upon how you make allocations of Certificate Value
among the Sub-Accounts.
Until further notice, Allmerica Financial Investment Management Services, Inc.
("AFIMS") has declared a voluntary expense limitation of 1.50% of average net
assets for Select International Equity Fund, 1.35% for Select Aggressive Growth
Fund and Select Capital Appreciation Fund, 1.25% for Select Value Opportunity
Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10% for Select Growth
and Income Fund,
C-1
<PAGE>
1.00% for Select Investment Grade Income Fund, and Government Bond Fund, and
0.60% for Money Market Fund. The total operating expenses of these Funds of AIT
were less than their respective expense limitations throughout 1999.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In 1999 the
Select Strategic Growth Fund received a reimbursement of $813 under its expense
limitation. However, this amount was not enough to make a difference in the
percentage shown as the Fund's total operating expenses and expense limitation
(both 1.20%). Until further notice, AFIMS has agreed to voluntarily waive its
management fee to the extent that expenses of the Select Emerging Markets Fund
exceed 2.00% of the Fund's average daily net assets, except that such waiver
shall not exceed the net amount of management fees earned by AFIMS from the Fund
after subtracting fees paid by AFIMS to a sub-advisor. Until further notice, the
Select Value Opportunity Fund's management fee rate has been voluntarily limited
to an annual rate of 0.90% of average daily net assets, and total expenses are
limited to 1.25% of average daily net assets. The declaration of a voluntary
management fee or expense limitation in any year does not bind AFIMS to declare
future expense limitations with respect to these Funds. These limitations may be
terminated at any time.
The Advisor has voluntarily undertaken to waive and reimburse its fee to the
Funds for certain expenses so that the Funds' total operating expenses will not
exceed 0.45% for the Deutsche VIT Small Cap Index and will not exceed 0.30% for
the Deutsche VIT Equity 500 Index. Without the reimbursement to the Funds' for
the year ended 12/31/99, the Management Fee, Other, and Total Expenses would
have been 0.35%, 0.83%, and 1.18% for the Deutsche VIT Small Cap Index and
0.20%, 0.23%, and 0.43% for the Deutsche VIT Equity 500 Index.
These fees reflect an agreement by the Morgan Guaranty Trust Company of New
York, an affiliate of J.P. Morgan, to reimburse the portfolio, to the extent
certain expenses exceed 1.15% of the portfolio's average daily net assets during
fiscal year 2000. Had there been no fee waiver and expense reimbursements, Other
Expenses and Total Fund Expenses would have been 1.97% and 2.57%, respectively.
The investment adviser of the Warburg Pincus Global Post-Venture Capital
Portfolio has voluntarily agreed to waive or reimburse a portion of the
management fees and/or other expenses resulting in a reduction of total
expenses. Absent any waiver or reimbursement, the Management Fee, Other Expenses
and Total Portfolio Expenses would have been 1.25%, 0.33% and 1.58% for the
Warburg Pincus Global Post-Venture Capital Portfolio, respectively, for the year
ended December 31, 1999.
Goldman Sachs Asset Management has voluntarily agreed to reduce or limit certain
other expenses (excluding management fees, taxes, interest, brokerage fees, and
other expenses). Without any such limitation or reduction, the Other Expenses
would have been 0.42% for the Goldman Sachs VIT CORE Large Cap Growth Fund,
0.96% for the Goldman Sachs VIT CORE Small Cap Equity Fund, and 1.06% for the
Goldman Sachs VIT Capital Growth Fund.
Morgan Stanley Asset Management ("MSAM") has voluntarily agreed to waive its
management fees and to reimburse the UIF Technology Portfolio if processing of
such fees would cause the total annual operating expenses of the portfolio to
exceed 1.15% of average daily net assets. This fee waiver and reimbursement are
voluntary and may be terminated at any time without notice. Without the
reimbursement, total fund expenses would have been 12.57% in 1999.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
C-2
<PAGE>
NET ANNUAL RATES OF INVESTMENT
Taking into account the assumed 0.90% charge for Underlying Investment Company
advisory fees and operating expenses, the gross annual rates of investment
return of 0%, 6% and 12% correspond to net annual rates of -0.90%, 5.10% and
11.10%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE LIFE CERTIFICATE
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
DEATH BENEFIT OPTION 1
GUARANTEED ISSUE
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,250 3,710 3,710 250,000 3,952 3,952 250,000 4,195 4,195 250,000
2 10,763 7,588 7,588 250,000 8,321 8,321 250,000 9,083 9,083 250,000
3 16,551 11,381 11,381 250,000 12,859 12,859 250,000 14,459 14,459 250,000
4 22,628 15,091 15,091 250,000 17,578 17,578 250,000 20,377 20,377 250,000
5 29,010 18,713 18,713 250,000 22,478 22,478 250,000 26,889 26,889 250,000
6 35,710 22,640 22,640 250,000 27,979 27,979 250,000 34,487 34,487 250,000
7 42,746 26,469 26,469 250,000 33,694 33,694 250,000 42,855 42,855 250,000
8 50,133 30,199 30,199 250,000 39,630 39,630 250,000 52,079 52,079 250,000
9 57,889 33,731 33,731 250,000 45,703 45,703 250,000 62,159 62,159 250,000
10 66,034 37,017 37,017 250,000 51,874 51,874 250,000 73,154 73,154 250,000
11 74,586 40,293 40,293 250,000 58,437 58,437 250,000 85,532 85,532 250,000
12 83,565 43,394 43,394 250,000 65,212 65,212 250,000 99,205 99,205 250,000
13 92,993 46,340 46,340 250,000 72,234 72,234 250,000 114,354 114,354 250,000
14 102,893 49,109 49,109 250,000 79,503 79,503 250,000 131,156 131,156 250,000
15 113,287 51,690 51,690 250,000 87,031 87,031 250,000 149,824 149,824 250,000
16 124,202 54,110 54,110 250,000 94,867 94,867 250,000 170,626 170,626 250,000
17 135,662 56,343 56,343 250,000 103,016 103,016 250,000 193,839 193,839 250,000
18 147,695 58,372 58,372 250,000 111,498 111,498 250,000 219,660 219,660 276,771
19 160,330 60,186 60,186 250,000 120,339 120,339 250,000 248,213 248,213 307,784
20 173,596 61,765 61,765 250,000 129,566 129,566 250,000 279,792 279,792 341,346
Age 60 113,287 51,690 51,690 250,000 87,031 87,031 250,000 149,824 149,824 250,000
Age 65 173,596 61,765 61,765 250,000 129,566 129,566 250,000 279,792 279,792 341,346
Age 70 250,567 65,844 65,844 250,000 184,273 184,273 250,000 498,305 498,305 578,034
Age 75 348,804 59,643 59,643 250,000 258,193 258,193 276,266 862,783 862,783 923,178
</TABLE>
(1) Assumes a $5,000 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY GROUP VARIABLE LIFE CERTIFICATE
MALE NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
DEATH BENEFIT OPTION 1
GUARANTEED ISSUE
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,250 2,967 2,967 250,000 3,184 3,184 250,000 3,402 3,402 250,000
2 10,763 5,816 5,816 250,000 6,435 6,435 250,000 7,083 7,083 250,000
3 16,551 8,544 8,544 250,000 9,754 9,754 250,000 11,069 11,069 250,000
4 22,628 11,150 11,150 250,000 13,137 13,137 250,000 15,388 15,388 250,000
5 29,010 13,629 13,629 250,000 16,583 16,583 250,000 20,070 20,070 250,000
6 35,710 16,233 16,233 250,000 20,355 20,355 250,000 25,421 25,421 250,000
7 42,746 18,690 18,690 250,000 24,186 24,186 250,000 31,225 31,225 250,000
8 50,133 20,987 20,987 250,000 28,067 28,067 250,000 37,520 37,520 250,000
9 57,889 23,111 23,111 250,000 31,988 31,988 250,000 44,347 44,347 250,000
10 66,034 25,051 25,051 250,000 35,939 35,939 250,000 51,758 51,758 250,000
11 74,586 26,866 26,866 250,000 40,008 40,008 250,000 59,948 59,948 250,000
12 83,565 28,477 28,477 250,000 44,104 44,104 250,000 68,884 68,884 250,000
13 92,993 29,878 29,878 250,000 48,225 48,225 250,000 78,654 78,654 250,000
14 102,893 31,052 31,052 250,000 52,358 52,358 250,000 89,356 89,356 250,000
15 113,287 31,975 31,975 250,000 56,490 56,490 250,000 101,097 101,097 250,000
16 124,202 32,623 32,623 250,000 60,603 60,603 250,000 114,005 114,005 250,000
17 135,662 32,968 32,968 250,000 64,679 64,679 250,000 128,233 128,233 250,000
18 147,695 32,965 32,965 250,000 68,688 68,688 250,000 143,951 143,951 250,000
19 160,330 32,570 32,570 250,000 72,600 72,600 250,000 161,373 161,373 250,000
20 173,596 31,735 31,735 250,000 76,385 76,385 250,000 180,756 180,756 250,000
Age 60 113,287 31,975 31,975 250,000 56,490 56,490 250,000 101,097 101,097 250,000
Age 65 173,596 31,735 31,735 250,000 76,385 76,385 250,000 180,756 180,756 250,000
Age 70 250,567 20,511 20,511 250,000 97,008 97,008 250,000 326,211 326,211 378,405
Age 75 348,804 0 0 0 111,136 111,136 250,000 567,113 567,113 606,811
</TABLE>
(1) Assumes a $5,000 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE LIFE CERTIFICATE
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $250,000
DEATH BENEFIT OPTION 2
GUARANTEED ISSUE
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ---------------------------------- ----------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- ---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 8,400 6,535 6,535 256,535 6,942 6,942 256,942 7,350 7,350 257,350
2 17,220 13,378 13,378 263,378 14,627 14,627 264,627 15,925 15,925 265,925
3 26,481 20,122 20,122 270,122 22,662 22,662 272,662 25,406 25,406 275,406
4 36,205 26,766 26,766 276,766 31,061 31,061 281,061 35,887 35,887 285,887
5 46,415 33,311 33,311 283,311 39,840 39,840 289,840 47,473 47,473 297,473
6 57,136 40,121 40,121 290,121 49,398 49,398 299,398 60,679 60,679 310,679
7 68,393 46,827 46,827 296,827 59,386 59,386 309,386 75,275 75,275 325,275
8 80,213 53,429 53,429 303,429 69,824 69,824 319,824 91,409 91,409 341,409
9 92,623 59,898 59,898 309,898 80,701 80,701 330,701 109,210 109,210 359,210
10 105,654 66,218 66,218 316,218 92,016 92,016 342,016 128,835 128,835 378,835
11 119,337 72,670 72,670 322,670 104,162 104,162 354,162 150,978 150,978 400,978
12 133,704 79,007 79,007 329,007 116,861 116,861 366,861 175,495 175,495 426,452
13 148,789 85,238 85,238 335,238 130,147 130,147 380,147 202,636 202,636 478,221
14 164,629 91,356 91,356 341,356 144,042 144,042 394,042 232,652 232,652 532,774
15 181,260 97,355 97,355 347,355 158,567 158,567 408,567 265,839 265,839 590,164
16 198,723 103,241 103,241 353,241 173,761 173,761 423,761 302,543 302,543 650,468
17 217,059 109,003 109,003 359,003 189,642 189,642 439,642 343,114 343,114 717,109
18 236,312 114,634 114,634 364,634 206,237 206,237 456,237 387,952 387,952 787,542
19 256,528 120,135 120,135 370,135 223,579 223,579 473,579 437,508 437,508 861,891
20 277,754 125,515 125,515 375,515 241,716 241,716 491,716 492,306 492,306 940,304
Age 60 558,086 173,430 173,430 423,430 480,735 480,735 730,735 1,509,447 1,509,447 2,022,659
Age 65 758,691 189,265 189,265 439,265 645,191 645,191 895,191 2,571,810 2,571,810 3,137,609
Age 70 1,014,718 195,696 195,696 445,696 846,067 846,067 1,096,067 4,336,175 4,336,175 5,029,963
Age 75 1,341,481 188,228 188,228 438,228 1,087,965 1,087,965 1,337,965 7,279,142 7,279,142 7,788,682
</TABLE>
(1) Assumes a $8,000 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE LIFE CERTIFICATE
MALE NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $250,000
DEATH BENEFIT OPTION 2
GUARANTEED ISSUE
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- --------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 8,400 6,096 6,096 256,096 6,487 6,487 256,487 6,878 6,878 256,878
2 17,220 12,060 12,060 262,060 13,222 13,222 263,222 14,432 14,432 264,432
3 26,481 17,892 17,892 267,892 20,214 20,214 270,214 22,728 22,728 272,728
4 36,205 23,589 23,589 273,589 27,466 27,466 277,466 31,833 31,833 281,833
5 46,415 29,152 29,152 279,152 34,987 34,987 284,987 41,825 41,825 291,825
6 57,136 34,708 34,708 284,708 42,914 42,914 292,914 52,925 52,925 302,925
7 68,393 40,127 40,127 290,127 51,132 51,132 301,132 65,106 65,106 315,106
8 80,213 45,406 45,406 295,406 59,643 59,643 309,643 78,467 78,467 328,467
9 92,623 50,544 50,544 300,544 68,458 68,458 318,458 93,123 93,123 343,123
10 105,654 55,541 55,541 305,541 77,584 77,584 327,584 109,200 109,200 359,200
11 119,337 60,550 60,550 310,550 87,238 87,238 337,238 127,121 127,121 377,121
12 133,704 65,423 65,423 315,423 97,251 97,251 347,251 146,823 146,823 396,823
13 148,789 70,162 70,162 320,162 107,636 107,636 357,636 168,484 168,484 418,484
14 164,629 74,763 74,763 324,763 118,404 118,404 368,404 192,299 192,299 442,299
15 181,260 79,224 79,224 329,224 129,564 129,564 379,564 218,466 218,466 484,995
16 198,723 83,541 83,541 333,541 141,127 141,127 391,127 247,176 247,176 531,428
17 217,059 87,710 87,710 337,710 153,103 153,103 403,103 278,661 278,661 582,401
18 236,312 91,729 91,729 341,729 165,505 165,505 415,505 313,190 313,190 635,775
19 256,528 95,594 95,594 345,594 178,344 178,344 428,344 351,054 351,054 691,577
20 277,754 99,300 99,300 349,300 191,629 191,629 441,629 392,578 392,578 749,824
Age 60 558,086 135,017 135,017 385,017 378,918 378,918 628,918 1,200,142 1,200,142 1,608,190
Age 65 758,691 141,408 141,408 391,408 501,641 501,641 751,641 2,034,678 2,034,678 2,482,308
Age 70 1,014,718 133,825 133,825 383,825 643,251 643,251 893,251 3,405,680 3,405,680 3,950,588
Age 75 1,341,481 103,418 103,418 353,418 798,281 798,281 1,048,281 5,670,041 5,670,041 6,066,944
</TABLE>
(1) Assumes a $8,000 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE LIFE CERTIFICATE
MALE NON-SMOKER AGE 40
SPECIFIED FACE AMOUNT = $250,000
DEATH BENEFIT OPTION 3
GUARANTEED ISSUE
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- --------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 11,865 9,257 9,257 250,000 9,833 9,833 250,000 10,409 10,409 250,000
2 24,323 18,932 18,932 250,000 20,700 20,700 250,000 22,538 22,538 250,000
3 37,404 28,463 28,463 250,000 32,060 32,060 250,000 35,946 35,946 250,000
4 51,140 37,847 37,847 250,000 43,931 43,931 250,000 50,767 50,767 250,000
5 65,562 47,086 47,086 250,000 56,337 56,337 250,000 67,153 67,153 250,000
6 80,705 56,707 56,707 250,000 69,857 69,857 250,000 85,848 85,848 263,745
7 96,605 66,178 66,178 250,000 83,992 83,992 250,000 106,457 106,457 316,608
8 113,300 75,499 75,499 250,000 98,723 98,723 284,282 129,158 129,158 371,923
9 130,830 84,628 84,628 250,000 114,006 114,006 317,930 154,084 154,084 429,694
10 149,237 93,530 93,530 252,643 129,810 129,810 350,643 181,377 181,377 489,935
11 168,564 102,591 102,591 268,484 146,698 146,698 383,913 212,011 212,011 554,841
12 188,857 111,457 111,457 282,658 164,252 164,252 416,546 245,708 245,708 623,123
13 210,165 120,142 120,142 295,332 182,512 182,512 448,651 282,796 282,796 695,167
14 232,538 128,641 128,641 306,618 201,495 201,495 480,266 323,592 323,592 771,284
15 256,030 136,945 136,945 316,602 221,207 221,207 511,407 368,429 368,429 851,768
16 280,696 145,082 145,082 325,465 241,716 241,716 542,246 417,774 417,774 937,202
17 306,596 153,041 153,041 333,274 263,029 263,029 572,795 472,036 472,036 1,027,946
18 333,791 160,823 160,823 340,121 285,173 285,173 603,108 531,692 531,692 1,124,466
19 362,345 168,423 168,423 346,064 308,163 308,163 633,193 597,241 597,241 1,227,172
20 392,328 175,833 175,833 351,156 332,009 332,009 663,056 669,220 669,220 1,336,500
Age 60 392,328 175,833 175,833 351,156 332,009 332,009 663,056 669,220 669,220 1,336,500
Age 65 566,282 211,241 211,241 368,560 467,487 467,487 815,641 1,155,016 1,155,016 2,015,197
Age 70 788,297 241,336 241,336 373,354 627,412 627,412 970,622 1,921,841 1,921,841 2,973,139
Age 75 1,071,650 266,155 266,155 370,968 813,759 813,759 1,134,220 3,119,972 3,119,972 4,348,626
</TABLE>
(1) Assumes a $11,300 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
GROUP VARIABLE LIFE CERTIFICATE
MALE NON-SMOKER AGE 40
SPECIFIED FACE AMOUNT = $250,000
DEATH BENEFIT OPTION 3
GUARANTEED ISSUE
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 11,865 8,577 8,577 250,000 9,128 9,128 250,000 9,680 9,680 250,000
2 24,323 16,957 16,957 250,000 18,597 18,597 250,000 20,305 20,305 250,000
3 37,404 25,143 25,143 250,000 28,422 28,422 250,000 31,973 31,973 250,000
4 51,140 33,139 33,139 250,000 38,617 38,617 250,000 44,791 44,791 250,000
5 65,562 40,947 40,947 250,000 49,199 49,199 250,000 58,879 58,879 250,000
6 80,705 48,768 48,768 250,000 60,391 60,391 250,000 74,583 74,583 250,000
7 96,605 56,401 56,401 250,000 72,013 72,013 250,000 91,835 91,835 268,473
8 113,300 63,851 63,851 250,000 84,089 84,089 250,000 110,648 110,648 313,223
9 130,830 71,119 71,119 250,000 96,592 96,592 264,825 131,151 131,151 359,574
10 149,237 78,209 78,209 250,000 109,466 109,466 290,735 153,488 153,488 407,654
11 168,564 85,338 85,338 250,000 123,008 123,008 316,550 178,215 178,215 458,622
12 188,857 92,301 92,301 250,000 136,963 136,963 341,599 205,183 205,183 511,745
13 210,165 99,098 99,098 250,000 151,332 151,332 365,906 234,573 234,573 567,175
14 232,538 105,711 105,711 250,000 166,109 166,109 389,496 266,575 266,575 625,072
15 256,030 112,102 112,102 255,011 181,292 181,292 412,405 301,397 301,397 685,622
16 280,696 118,267 118,267 261,107 196,876 196,876 434,659 339,257 339,257 749,006
17 306,596 124,205 124,205 266,250 212,860 212,860 456,292 380,398 380,398 815,433
18 333,791 129,923 129,923 270,529 229,247 229,247 477,345 425,089 425,089 885,134
19 362,345 135,418 135,418 274,005 246,032 246,032 497,820 473,601 473,601 958,286
20 392,328 140,688 140,688 276,742 263,202 263,202 517,735 526,217 526,217 1,035,102
Age 60 392,328 140,688 140,688 276,742 263,202 263,202 517,735 526,217 526,217 1,035,102
Age 65 566,282 170,333 170,333 293,106 368,902 368,902 634,801 896,401 896,401 1,542,511
Age 70 788,297 194,045 194,045 296,511 488,259 488,259 746,088 1,459,667 1,459,667 2,230,455
Age 75 1,071,650 211,449 211,449 291,561 618,517 618,517 852,857 2,297,004 2,297,004 3,167,277
</TABLE>
(1) Assumes a $11,300 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-9
<PAGE>
APPENDIX D
MONTHLY EXPENSE CHARGE TABLE
(PER THOUSAND OF BASE FACE AMOUNT)
<TABLE>
<CAPTION>
Unit Charges/per $1,000 Face
Issue Age Non-smoker Smoker
--------- ---------- ------
<S> <C> <C>
0 0.0250 0.0250
1 0.0275 0.0275
2 0.0275 0.0275
3 0.0275 0.0275
4 0.0275 0.0275
5 0.0300 0.0300
6 0.0300 0.0300
7 0.0300 0.0300
8 0.0300 0.0300
9 0.0325 0.0325
10 0.0325 0.0325
11 0.0325 0.0325
12 0.0350 0.0350
13 0.0350 0.0350
14 0.0350 0.0350
15 0.0375 0.0375
16 0.0375 0.0375
17 0.0375 0.0375
18 0.0300 0.0400
19 0.0300 0.0400
20 0.0325 0.0400
21 0.0325 0.0425
22 0.0325 0.0425
23 0.0350 0.0425
24 0.0350 0.0450
25 0.0375 0.0450
26 0.0375 0.0475
27 0.0375 0.0475
28 0.0400 0.0475
29 0.0400 0.0500
30 0.0425 0.0500
31 0.0425 0.0525
32 0.0425 0.0525
33 0.0450 0.0525
34 0.0450 0.0550
35 0.0450 0.0550
36 0.0500 0.0600
37 0.0525 0.0650
38 0.0575 0.0700
39 0.0600 0.0725
40 0.0650 0.0775
41 0.0675 0.0825
42 0.0725 0.0875
43 0.0750 0.0925
44 0.0800 0.0975
45 0.0825 0.1000
46 0.0875 0.1050
47 0.0900 0.1100
48 0.0950 0.1150
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
Unit Charges/per $1,000 Face
Issue Age Non-smoker Smoker
--------- ---------- ------
<S> <C> <C>
49 0.1000 0.1200
50 0.1050 0.1250
51 0.1075 0.1300
52 0.1100 0.1325
53 0.1150 0.1375
54 0.1175 0.1425
55 0.1200 0.1475
56 0.1275 0.1550
57 0.1375 0.1650
58 0.1450 0.1750
59 0.1525 0.1825
60 0.1600 0.1925
61 0.1700 0.1975
62 0.1775 0.2025
63 0.1875 0.2075
64 0.1975 0.2125
65 0.2075 0.2175
66 0.2075 0.2150
67 0.2050 0.2150
68 0.2050 0.2125
69 0.2050 0.2125
70 0.2050 0.2100
71 0.2050 0.2100
72 0.2050 0.2100
73 0.2050 0.2100
74 0.2050 0.2100
75 0.2050 0.2100
76 0.2050 0.2100
77 0.2050 0.2100
78 0.2050 0.2100
79 0.2050 0.2100
80 0.2050 0.2100
81 0.2050 0.2100
82 0.2050 0.2100
83 0.2050 0.2100
84 0.2050 0.2100
85 0.2050 0.2100
</TABLE>
Example 1
Assume that a Nonsmoker, Age 40, purchases a Certificate with a Face Amount of
$100,000, of which $50,000 is attributable to the Base Amount and $50,000 is
attributable to the Insured Term Rider. The Monthly Expense Charge, if
applicable, is assessed only on the Base Amount. From the table above, the
Monthly Expense Charge would be $3.25 per month or (0.0650 per $1000 Base Face
*$50,000 Base Amount).
Example 2:
Assume that a Nonsmoker, Age 40, purchases a Certificate with a Face Amount of
$100,000, all of which is attributable to the Base Amount (there is no Insured
Term Rider). From the table above, the monthly expense charge would be $6.50 per
month or (0.0650 per $1000 Base Face *$100,000 Base Face).
D-2
<PAGE>
APPENDIX E
PERFORMANCE INFORMATION
The Certificates will first be offered to the public in 2000. However, the
Company may advertise "Total Return" and "Average Annual Total Return"
performance information based on the periods that the Sub-Accounts have been in
existence (Tables I(A) and I(B)), and based on the periods that the Underlying
Funds have been in existence (Tables II (A) and II (B)). The results for any
period prior to the Certificates being offered will be calculated as if the
Certificates had been offered during that period of time, with all charges
assumed to be those applicable to the Sub-Accounts, the Underlying Funds, and
(in Tables I(A) and II(A)) under a "representative" Certificate that is
surrendered at the end of the applicable period. For more information on charges
under the Certificates, see CHARGES AND DEDUCTIONS.
In each Table in Appendix E, "One-Year Total Return" refers to the total of the
income generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1999. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (2) other groups of variable life separate accounts or other
investment products tracked by Lipper Inc., a widely used independent research
firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, such as Morningstar, Inc., who rank such
investment products on overall performance or other criteria; or (3) the
Consumer Price Index (a measure for inflation) to assess the real rate of return
from an investment. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
E-1
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges for a
representative Certificate. It is assumed that the Insured is male, Age 36,
standard (non-smoker) Premium Class, that the Face Amount of the Certificate is
$250,000, that an annual premium payment of $3,000 (approximately one Guideline
Annual Premium) was made at the beginning of each Certificate year, that ALL
premiums were allocated to EACH Sub-Account individually, and that there was a
full surrender of the Certificate at the end of the applicable period.
<TABLE>
TEN YEARS OR
LIFE OF
INCEPTION ONE-YEAR 5 SUB-ACCOUNT
UNDERLYING FUND DATE TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C> <C>
UIF Technology Portfolio N/A N/A N/A N/A
Select Strategic Growth Fund N/A N/A N/A N/A
Warburg Pincus Small Company Growth Portfolio N/A N/A N/A N/A
Warburg Pincus Global Post-Venture Capital
Portfolio N/A N/A N/A N/A
Select Aggressive Growth Fund 11/13/1996 4.92% 13.65% 6.82%
Deutsche VIT Small Cap Index N/A N/A N/A N/A
Select Capital Appreciation Fund 11/13/1996 -5.75% N/A 2.37%
Goldman Sachs VIT CORE Small Cap Equity Fund N/A N/A N/A N/A
J.P. Morgan Small Company Portfolio N/A N/A N/A N/A
Select Value Opportunity Fund 11/13/1996 -29.77% 4.07% -3.78%
Select Emerging Markets Fund N/A N/A N/A N/A
Select International Equity Fund 11/13/1996 -0.66% 8.98% 4.69%
Fidelity VIP Overseas Portfolio 11/13/1996 8.04% 7.84% 7.48%
T. Rowe Price International Stock Portfolio N/A N/A N/A N/A
Fidelity VIP Growth Portfolio 11/13/1996 3.94% 19.90% 16.71%
Select Growth Fund 11/13/1996 -2.19% 19.24% 16.62%
Goldman Sachs VIT Capital Growth Fund N/A N/A N/A N/A
Core Equity Fund 11/13/1996 -2.57% 15.51% 9.77%
Fidelity VIP II Contrafund Portfolio N/A N/A N/A N/A
Goldman Sachs VIT CORE Large Cap Growth Fund N/A N/A N/A N/A
Select Growth and Income Fund N/A N/A N/A N/A
Duetsche VIT Equity 500 Index N/A N/A N/A N/A
Fidelity VIP Equity-Income Portfolio 11/13/1996 -20.98% 9.05% 1.21%
Fidelity VIP High Income Portfolio 11/13/1996 -19.53% 1.49% -6.04%
PIMCO Total Return Bond Portfolio II N/A N/A N/A N/A
Select Investment Grade Income Fund 11/13/1996 -26.80% -1.95% -7.86%
Government Bond Fund 11/13/1996 -25.85% -3.09% -8.19%
Money Market Fund 11/13/1996 -21.89% -3.83% -7.83%
</TABLE>
No performance information is given for the other Sub-Accounts because they had
not begun operations as of the date of this Prospectus.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-2
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY CERTIFICATE CHARGES
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT REFLECT
MONTHLY CHARGES UNDER THE CERTIFICATE. It is assumed that an annual premium
payment of $3,000 (approximately one Guideline Annual Premium) was made at the
beginning of each Certificate year and that ALL premiums were allocated to EACH
Sub-Account individually.
<TABLE>
TEN YEARS OR
LIFE OF
INCEPTION ONE-YEAR 5 SUB-ACCOUNT
UNDERLYING FUND DATE TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C> <C>
UIF Technology Portfolio N/A N/A N/A N/A
Select Strategic Growth Fund N/A N/A N/A N/A
Warburg Pincus Small Company Growth Portfolio N/A N/A N/A N/A
Warburg Pincus Global Post-Venture Capital
Portfolio N/A N/A N/A N/A
Select Aggressive Growth Fund 11/13/1996 37.41% 22.21% 19.73%
Deutsche VIT Small Cap Index N/A N/A N/A N/A
Select Capital Appreciation Fund 11/13/1996 24.23% N/A 15.03%
Goldman Sachs VIT CORE Small Cap Equity Fund N/A N/A N/A N/A
J.P. Morgan Small Company Portfolio N/A N/A N/A N/A
Select Value Opportunity Fund 11/13/1996 -5.56% 12.50% 8.54%
Select Emerging Markets Fund N/A N/A N/A N/A
Select International Equity Fund 11/13/1996 30.53% 17.47% 17.48%
Fidelity VIP Overseas Portfolio 11/13/1996 41.27% 16.31% 20.42%
T. Rowe Price International Stock Portfolio N/A N/A N/A N/A
Fidelity VIP Growth Portfolio 11/13/1996 36.20% 28.57% 30.17%
Select Growth Fund 11/13/1996 28.63% 27.90% 30.07%
Goldman Sachs VIT Capital Growth Fund N/A N/A N/A N/A
Core Equity Fund 11/13/1996 28.17% 24.10% 22.84%
Fidelity VIP II Contrafund Portfolio N/A N/A N/A N/A
Goldman Sachs VIT CORE Large Cap Growth Fund N/A N/A N/A N/A
Select Growth and Income Fund N/A N/A N/A N/A
Duetsche VIT Equity 500 Index N/A N/A N/A N/A
Fidelity VIP Equity-Income Portfolio 11/13/1996 5.37% 17.54% 13.81%
Fidelity VIP High Income Portfolio 11/13/1996 7.18% 9.88% 6.16%
PIMCO Total Return Bond Portfolio II N/A N/A N/A N/A
Select Investment Grade Income Fund 11/13/1996 -1.86% 6.41% 4.24%
Government Bond Fund 11/13/1996 -0.67% 5.26% 3.89%
Money Market Fund 11/13/1996 4.24% 4.52% 4.27%
</TABLE>
No performance information is given for the other Sub-Accounts because they had
not begun operations as of the date of this Prospectus.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-3
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges for a
representative Certificate. It is assumed that the Insured is male, Age 36,
standard (nonsmoker) Premium Class, that the Face Amount of the Certificate is
$250,000, that an annual premium payment of $3,000 (approximately one Guideline
Annual Premium) was made at the beginning of each Certificate year, that ALL
premiums were allocated to EACH Sub-Account individually, and that there was a
full surrender of the Certificate at the end of the applicable period.
<TABLE>
TEN YEARS OR
LIFE OF
INCEPTION ONE-YEAR 5 SUB-ACCOUNT
UNDERLYING FUND DATE TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C> <C>
UIF Technology Portfolio 11/30/1999 N/A N/A -12.47%
Select Strategic Growth Fund 02/20/1998 -13.20% N/A -12.26%
Warburg Pincus Trust Small Company Growth
Portfolio 06/30/1995 29.40% N/A 14.05%
Warburg Pincus Trust Global Post-Venture
Capital Portfolio 09/30/1996 24.45% N/A 8.58%
Select Aggressive Growth Fund 08/21/1992 4.92% 13.65% 14.13%
Deutsche VIT Small Cap Index 08/25/1997 -9.92% N/A -7.13%
Select Capital Appreciation Fund 04/28/1995 -5.75% N/A 11.19%
Goldman Sachs VIT CORE Small Cap Equity Fund 02/13/1998 -12.02% N/A -15.09%
J.P. Morgan Small Company Portfolio 12/31/1994 9.52% 12.37% 12.37%
Select Value Opportunity Fund 04/30/1993 -29.77% 4.07% 4.48%
Select Emerging Markets Fund 02/20/1998 26.69% N/A -4.94%
Select International Equity Fund 05/02/1994 -0.66% 8.98% 7.05%
Fidelity VIP Overseas Portfolio 01/28/1987 8.04% 7.84% 6.46%
T. Rowe Price International Stock Portfolio 03/31/1994 0.63% 5.74% 5.21%
Fidelity VIP Growth Portfolio 10/09/1986 3.94% 19.90% 14.95%
Select Growth Fund 08/21/1992 -2.19% 19.24% 13.99%
Goldman Sachs VIT Capital Growth Fund 04/30/1998 -4.34% N/A 1.04%
Core Equity Fund 04/29/1985 -2.57% 15.51% 12.34%
Fidelity VIP II Contrafund Portfolio 01/03/1995 -6.65% N/A 17.93%
Goldman Sachs VIT CORE Large Cap Growth Fund 02/13/1998 2.31% N/A 6.26%
Select Growth and Income Fund 08/21/1992 -11.30% 12.06% 9.41%
Duetsche VIT Equity 500 Index 10/01/1997 -9.74% N/A 4.29%
Fidelity VIP Equity-Income Portfolio 10/09/1986 -20.98% 9.05% 9.53%
Fidelity VIP High Income Portfolio 09/19/1985 -19.53% 1.49% 7.47%
PIMCO Total Return Bond Portfolio II 12/31/1997 -26.50% N/A -13.57%
Select Investment Grade Income Fund 04/29/1985 -26.80% -1.95% 2.71%
Government Bond Fund 08/26/1991 -25.85% -3.09% 0.44%
Money Market Fund 04/29/1985 -21.89% -3.83% 0.23%
</TABLE>
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-4
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CERTIFICATE CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT
REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE CHARGES. It is assumed that an
annual premium payment of $3,000 (approximately one Guideline Annual Premium)
was made at the beginning of each Certificate year and that ALL premiums were
allocated to EACH Sub-Account individually.
<TABLE>
TEN YEARS OR
LIFE OF
INCEPTION ONE-YEAR 5 SUB-ACCOUNT
UNDERLYING FUND DATE TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C> <C>
UIF Technology Portfolio 11/30/1999 N/A N/A 23.04%
Select Strategic Growth Fund 02/20/1998 15.02% N/A 5.93%
Warburg Pincus Trust Small Company Growth
Portfolio 06/30/1995 67.56% N/A 23.59%
Warburg Pincus Trust Global Post-Venture
Capital Portfolio 09/30/1996 61.47% N/A 21.21%
Select Aggressive Growth Fund 08/21/1992 37.41% 22.21% 19.62%
Deutsche VIT Small Cap Index 08/25/1997 19.08% N/A 8.40%
Select Capital Appreciation Fund 04/28/1995 24.23% N/A 20.33%
Goldman Sachs VIT CORE Small Cap Equity Fund 02/13/1998 16.48% N/A 2.53%
J.P. Morgan Small Company Portfolio 12/31/1994 43.09% 20.91% 20.91%
Select Value Opportunity Fund 04/30/1993 -5.56% 12.50% 10.57%
Select Emerging Markets Fund 02/20/1998 64.23% N/A 14.18%
Select International Equity Fund 05/02/1994 30.53% 17.47% 14.43%
Fidelity VIP Overseas Portfolio 01/28/1987 41.27% 16.31% 10.43%
T. Rowe Price International Stock Portfolio 03/31/1994 32.12% 14.18% 12.43%
Fidelity VIP Growth Portfolio 10/09/1986 36.20% 28.57% 18.86%
Select Growth Fund 08/21/1992 28.63% 27.90% 19.49%
Goldman Sachs VIT Capital Growth Fund 04/30/1998 25.98% N/A 23.31%
Core Equity Fund 04/29/1985 28.17% 24.10% 16.25%
Fidelity VIP II Contrafund Portfolio 01/03/1995 23.13% N/A 26.58%
Goldman Sachs VIT CORE Large Cap Growth Fund 02/13/1998 34.20% N/A 26.54%
Select Growth and Income Fund 08/21/1992 17.36% 20.60% 14.88%
Duetsche VIT Equity 500 Index 10/01/1997 19.30% N/A 21.43%
Fidelity VIP Equity-Income Portfolio 10/09/1986 5.37% 17.54% 13.46%
Fidelity VIP High Income Portfolio 09/19/1985 7.18% 9.88% 11.42%
PIMCO Total Return Bond Portfolio II 12/31/1997 -1.48% N/A 2.97%
Select Investment Grade Income Fund 04/29/1985 -1.86% 6.41% 6.72%
Government Bond Fund 08/26/1991 -0.67% 5.26% 5.20%
Money Market Fund 04/29/1985 4.24% 4.52% 4.28%
</TABLE>
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-5
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
<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) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 0.2 $ 1.0 $ 1.2 $ 953.4
Universal life and investment product policy fees 110.9 91.4 316.1 262.9
Net investment income 95.0 102.3 271.9 411.7
Net realized investment (losses) gains (21.5) (14.6) (47.9) 109.4
Other income 24.1 25.0 78.7 79.2
----------- ---------- --------- ----------
Total revenues 208.7 205.1 620.0 1,816.6
----------- ---------- --------- ----------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses 88.8 88.1 245.2 971.1
Policy acquisition expenses 14.4 17.4 60.5 222.0
Other operating expenses 69.3 59.5 198.6 283.0
Restructuring costs - - 11.0 -
----------- ---------- --------- ----------
Total benefits, losses and expenses 172.5 165.0 515.3 1,476.1
----------- ---------- --------- ----------
Income from continuing operations before federal income taxes 36.2 40.1 104.7 340.5
----------- ---------- --------- ----------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current (4.1) (2.7) (14.2) 69.9
Deferred 16.9 13.3 42.3 12.0
----------- ---------- --------- ----------
Total federal income tax expense 12.8 10.6 28.1 81.9
----------- ---------- --------- ----------
Income from continuing operations before minority interest 23.4 29.5 76.6 258.6
Minority interest - - - (39.9)
----------- ---------- --------- ----------
Income from continuing operations 23.4 29.5 76.6 218.7
Income (Loss) from operations of discontinued business (net
of applicable income tax (benefit) expense) 0.2 (14.9) 0.9 (18.2)
Loss on disposal of group life and health business - (30.5) - (30.5)
----------- ---------- --------- ----------
Net income (loss) $ 23.6 $ (15.9) $ 77.5 $ 170.0
=========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<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) 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of $4,274.0 and $3,721.6) $ 4,231.8 $ 3,660.7
Equity securities-at fair value (cost of $ 43.4 and $27.9) 60.6 51.4
Mortgage loans 489.9 521.2
Policy loans 185.3 170.5
Real estate and other long-term investments 192.1 177.0
-------------- --------------
Total investments 5,159.7 4,580.8
-------------- --------------
Cash and cash equivalents 163.4 279.3
Accrued investment income 78.6 73.3
Deferred policy acquisition costs 1,371.8 1,219.5
Benefits and unearned premiums 440.5 480.3
Deferred federal income taxes (24.9) 18.1
Premiums, accounts and notes receivable 37.2 81.0
Other assets 272.1 199.6
Closed Block assets 775.5 772.3
Separate account assets 18,660.1 17,629.6
-------------- --------------
Total assets $ 26,934.0 $ 25,333.8
============== ==============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,894.7 $ 2,825.0
Outstanding claims, losses and loss adjustment expenses 175.0 218.8
Unearned premiums 5.7 6.6
Contractholder deposit funds and other policy liabilities 2,047.0 2,025.5
-------------- --------------
Total policy liabilities and accruals 5,122.4 5,075.9
-------------- --------------
Expenses and taxes payable 469.7 512.0
Reinsurance premiums payable 9.7 17.9
Trust instruments supported by funding obligation 546.8 50.6
Short-term debt - -
Closed Block liabilities 841.5 842.1
Separate account liabilities 18,659.3 17,628.9
-------------- --------------
Total liabilities 25,649.4 24,127.4
-------------- --------------
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 569.0 569.0
Accumulated other comprehensive loss (14.2) (14.9)
Retained earnings 724.8 647.3
-------------- --------------
Total shareholder's equity 1,284.6 1,206.4
-------------- --------------
Total liabilities and shareholder's equity $ 26,934.0 $25,333.8
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<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) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK $ 5.0 $ 5.0
------------ -------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period 569.0 444.0
Capital contribution from parent - 125.0
------------ -------------
Balance at end of period 569.0 569.0
------------ -------------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation on investments:
Balance at beginning of period (14.9) 169.1
Net appreciation (depreciation) on available-for-sale securities 1.1 (287.4)
(Provision) benefit for deferred federal income taxes (0.4) 126.1
Distribution of subsidiaries (Note 3) - (72.9)
------------ -------------
Other comprehensive gain (loss) 0.7 (234.2)
------------ -------------
Balance at end of period (14.2) (65.1)
------------ -------------
RETAINED EARNINGS
Balance at beginning of period 647.3 1,698.3
Net income 77.5 170.0
Distribution of subsidiaries (Note 4) - (1,201.1)
------------ -------------
Balance at end of period 724.8 667.2
------------ -------------
Total shareholder's equity $ 1,284.6 $ 1,176.1
============ =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<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) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income (loss) $ 23.6 $ (15.9) $ 77.5 $ 170.0
------------- -------------- ---------------- ------------
Other comprehensive income:
Net appreciation (depreciation) on available-for-sale
securities 12.3 (17.9) 1.1 (287.4)
(Loss) benefit for deferred federal income taxes (4.3) 31.8 (0.4) 126.1
Minority interest - (31.8) - -
Distribution of subsidiaries (Note 4) - (72.9) - (72.9)
------------- -------------- ---------------- ------------
Other comprehensive loss 8.0 (90.8) 0.7 (234.2)
------------- -------------- ---------------- ------------
Comprehensive income (loss) $ 31.6 $ (106.7) $ 78.2 $ (64.2)
============= ============== ================ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<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) 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 77.5 $ 170.0
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Minority interest - 39.9
Net realized losses (gains) 51.5 (108.9)
Net amortization and depreciation 15.1 24.0
Loss on the disposal of group life and health business - 30.5
Deferred federal income taxes 42.4 (4.3)
Change in deferred acquisition costs (163.8) (135.6)
Change in premiums and notes receivable, net of reinsurance 35.5 (52.5)
Change in accrued investment income (5.3) 10.1
Change in policy liabilities and accruals, net 10.7 94.2
Change in reinsurance receivable 39.8 (38.2)
Change in expenses and taxes payable (58.4) 22.8
Separate account activity, net (0.2) 5.2
Other, net (56.1) (2.9)
---------------- ---------------
Net cash (used in) provided by operating activities (11.3) 54.3
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale fixed maturities 1,384.4 2,199.7
Proceeds from disposals of equity securities 1.7 375.6
Proceeds from disposals of other investments 25.3 26.4
Proceeds from mortgages matured or collected 83.0 86.5
Purchase of available-for-sale fixed maturities (1,987.8) (2,015.7)
Purchase of equity securities (15.4) (71.5)
Purchase of other investments (103.5) (113.7)
Capital expenditures (8.1) (23.4)
Purchase of Minority Interest - (325.5)
Distribution of subsidiaries - (202.2)
Other investing activities 1.4 -
---------------- ---------------
Net cash (used in) provided by investing activities (619.0) (63.8)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 588.2 1,368.0
Withdrawals from contractholder deposit funds (561.1) (1,014.8)
Change in trust agreements supported by funding obligations 496.3 -
Change in short term debt - (180.8)
Proceeds from issuance of common stock - 125.0
---------------- ---------------
Net cash provided by (used in) financing activities 523.4 297.4
---------------- ---------------
Net change in cash and cash equivalents (106.9) 287.9
Net change in cash held in the Closed Block (9.0) 9.0
Cash and cash equivalents, beginning of period 279.3 504.0
---------------- ---------------
Cash and cash equivalents, end of period $ 163.4 $ 800.9
================ ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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
the accounts of its wholly-owned life insurance subsidiary AFLIAC, its
non-insurance subsidiaries (principally brokerage and investment advisory
services), Allmerica Property and Casualty Companies, Inc. ("Allmerica P&C") (an
85.0%-owned non-insurance holding company), and various other non-insurance
subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 4). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 4.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest related 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.
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, 2000, 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 1999 Annual Audited
Financial Statements.
2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 regarding
the definition of employee, the criteria for determining a non-compensatory
plan, the accounting for changes to the terms of a previously fixed stock option
or award, the accounting for an exchange of stock compensation awards in a
business combination, and other stock compensation related issues. FIN 44 is
effective July 1, 2000, but to the extent that it covers certain events
occurring during the period after December 15, 1998, or January 12, 2000 but
before the effective date of July 1, 2000, the effects of applying the
Interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
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 all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on the type
of hedge transaction. For fair value hedge transactions in which the Company is
hedging changes in an asset's, liability's or firm commitment's fair value,
changes in the fair value of the derivative instruments will generally be offset
in the income statement by changes in the hedged item's fair value. For cash
flow hedge transactions, in which the Company is hedging the variability of cash
flows related to a variable rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified into earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. To the extent any hedges are determined to be ineffective, all
or a portion of the change in value of the derivative will be recognized
currently in earnings. This statement is effective for fiscal years beginning
after June 15, 2000. The Company has not yet determined the impact that the
adoption of Statement No. 133 will have on the Company's results of operations
or its financial position.
<PAGE>
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"). 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.
The Company also recorded a $30.5 million loss, net of taxes, on the disposal of
this segment, including $23.0 million of after tax losses generated after the
June 30, 1999 measurement date.
In March of 2000, the Company transferred its EBS business to Great-West Life
and Annuity Insurance Company of Denver and received consideration of
approximately $22.0 million, based on renewal rights for existing policies.
Additional consideration may be received in 2001, based on premium in force as
of March, 2001. However, the Company retained policy liabilities estimated at
$173.5 million at September 30, 2000 related to this business.
In October of 2000, the Company entered into a reinsurance agreement with
Reliastar under which the Company would cede its remaining waiver of premium
and long-term disability business associated with the discontinued lines of
business. The effective date of this agreement is April 1, 2000.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At September 30,
2000, the discontinued segment had assets of approximately $495.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $415.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $36.8 million and $89.7 million for the quarters ended September
30, 2000 and 1999, respectively, and $167.5 million and $277.1 million for the
nine months ended September 30, 2000 and 1999, respectively.
4. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company'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
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
following unaudited pro forma information presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1999. This
information is not necessarily indicative of future results.
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Months Ended September 30,
(In millions) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 620.0 $ 619.9
============= =============
Net realized capital losses included in revenue (47.9) (2.7)
============= =============
Income from continuing operations before taxes 104.7 151.3
Income taxes 28.1 40.2
------------- -------------
Net income from continuing operations 76.6 111.1
Income (loss) from operations of discontinued business (less applicable income
taxes (expense) benefit of $0.5 and $(10.2) for the nine months ended
September 30, 2000 and 1999), respectively. 0.9 (18.2)
------------- -------------
Loss on disposal of group life and health business, including provision of
$72.2 for operating losses during the phase-out period for the year ended
December 31, 1999 (less applicable income tax benefit of $16.4) - (30.5)
============= =============
Net income $ 77.5 $ 62.4
============= =============
</TABLE>
5. SIGNIFICANT TRANSACTIONS
During the second quarter of 2000, the Company adopted a formal company-wide
restructuring plan. This plan is the result of a corporate initiative that began
in the fall of 1999, intended to reduce expenses and enhance revenues. As a
result of the Company's restructuring plan, it recognized a pre-tax charge of
$11.0 million during the second quarter of 2000 as reflected in restructuring
costs in the Consolidated Statements of Income. Approximately $1.9 million of
this charge relates to severance and other employee related costs resulting from
the elimination of positions. All levels of employees, from staff to senior
management, were affected by the restructuring. In addition, approximately $9.1
million of this charge relates to other restructuring costs, including one-time
project costs.
Effective January 1, 1999, Allmerica P&C entered into a Whole Account Aggregate
Excess of Loss reinsurance agreement. The reinsurance agreement provided
accident year coverage for the three years 1999 to 2001 for the Company's
property and casualty business, and is subject to cancellation or commutation
annually at the Company's option. In accordance with the provisions of this
contract, Allmerica P&C exercised its option to cancel this contract effective
January 1, 2000. The program covers losses and allocated loss adjustment
expenses ("LAE"), including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.5% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. As a result
of this agreement and prior to the corporate reorganization discussed in
footnote 4, the Company recognized a net (benefit) expense of $(3.0) million and
$16.9 million for the quarter and six months ended June 30, 1999, based on
year-to-date estimates of losses and allocated loss adjustment expenses for
accident year 1999.
6. FEDERAL INCOME TAXES
Federal income tax expense for the six months ended June 30, 2000 and 1999, 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.
<PAGE>
7. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income is a net
pre-tax (loss) contribution from the Closed Block of $(1.1) million and $3.7
million for the third quarter and nine months ended September 30, 2000,
respectively, compared to $3.3 million and $10.4 million for the third quarter
and nine months ended September 30, 1999, respectively.
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER DECEMBER 31,
(In millions) 30, 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Fixed maturities-at fair value (amortized cost of $381.9 and $387.4) $ 371.4 $ 372.9
Mortgage loans 148.9 136.3
Policy loans 195.2 201.1
Cash and cash equivalents 31.5 22.6
Accrued investment income 14.5 14.0
Deferred policy acquisition costs 11.4 13.1
Other assets 3.1 12.3
---------- ---------
Total assets $ 776.0 $ 772.3
---------- ---------
Liabilities
Policy liabilities and accruals $ 826.5 $ 835.2
Other liabilities 15.6 6.9
---------- ---------
Total liabilities $ 842.1 $ 842.1
---------- ---------
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED) (Unaudited)
QUARTER ENDED Nine Months Ended
SEPTEMBER 30, September 30,
---------------------- ----------------------
(In millions) 2000 1999 2000 1999
================================================================================================================================
<S> <C> <C> <C> <C>
Revenues
Premiums $ 7.7 $ 8.0 $ 42.0 $ 43.6
Net investment income 13.1 13.9 40.1 40.5
Net realized investment gains (1.1) (0.7) (4.7) (0.2)
----------- ---------- ---------- ---------
Total revenues 19.7 21.2 77.4 83.9
----------- ---------- ---------- ---------
Benefits and expenses
Policy benefits 20.2 17.2 71.9 71.6
Policy acquisition expenses 0.5 0.6 1.5 1.7
Other operating expenses 0.1 0.1 0.3 0.2
----------- ---------- ---------- ---------
Total benefits and expenses 20.8 17.9 73.7 73.5
----------- ---------- ---------- ---------
Contribution from the Closed Block $ (1.1) $ 3.3 $ 3.7 $ 10.4
=========== ========== ========== =========
</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 through its Asset
Accumulation group. Within this broad area the Company conducts business
principally in two operating segments. These segments are 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.
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 short term and long term funding agreements. Short
term 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. Long term funding
agreements are investment contracts issued to various businesses or charitable
trusts, which are used to support debt issued by the trust to foreign and
domestic institutional buyers, such as banks, insurance companies, and pension
plans. These funding agreements have long maturities and may be issued with a
fixed or variable interest rate based on an index such as LIBOR. Prior to the
reorganization discussed in footnote 4, this segment's results also included a
registered investment advisor providing investment advisory services, primarily
to affiliates and to third parties, such as money market and other fixed income
clients.
In addition to the two 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, technology,
finance, human resources and the legal department.
<PAGE>
Prior to the reorganization discussed in footnote 4, the Company's results
included products and services offered through its Risk Management segment In
1999, the Company reorganized its Property and Casualty business 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 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. 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.
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.
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) 2000 1999 2000 1999
=============================================================================================================================
<S> <C> <C> <C> <C>
Segment revenues:
Risk Management $ - $ - $ - $ 1,075.2
------------ ------------ ------------ -----------
Asset Accumulation
Allmerica Financial Services 214.0 197.6 649.7 592.6
Allmerica Asset Management 38.1 38.5 96.6 113.4
------------ ------------ ------------ -----------
Subtotal 252.1 236.1 746.3 706.0
------------ ------------ ------------ -----------
Corporate - (0.1) - 0.6
Intersegment revenues - 1.9 - (0.4)
------------ ------------ ------------ -----------
Total segment revenues including Closed Block 252.1 237.9 746.3 1,781.4
Adjustments to segment revenues:
Adjustment for Closed Block (21.9) (18.2) (78.4) (73.8)
Net realized (losses) gains (21.5) (14.6) (47.9) 109.0
------------ ------------ ------------ -----------
Total revenues $ 208.7 $ 205.1 $ 620.0 $ 1,816.6
============ ============ ============ ============
Segment income (loss) before income taxes and
minority interest:
Risk Management $ - $ 0.2 $ - $ 85.1
------------ ------------ ------------ -----------
Asset Accumulation
Allmerica Financial Services 57.4 54.9 168.1 152.1
Allmerica Asset Management 4.4 4.7 11.5 17.2
------------ ------------ ------------ -----------
Subtotal 61.8 59.6 179.6 169.3
------------ ------------ ------------ -----------
Corporate (10.8) (3.8) (22.0) (28.9)
------------ ------------ ------------ -----------
Segment income before income taxes and
minority interest 51.0 56.0 157.6 225.5
Adjustments to segment income:
Net realized investment gains, net of amortization (14.8) (15.9) (41.9) 115.0
------------ ------------ ------------ -----------
Other items - - (11.0) -
Income from continuing operations before taxes and
minority interest $ 36.2 $ 40.1 $ 104.7 $ 340.5
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
---------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
(In millions) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk Management $ 488.3 $ 542.0 $ 3.9 $ 6.0
-------------- -------------- -------------- -----------
Asset Accumulation
Allmerica Financial Services 24,256.9 23,410.7 1,367.7 1,213.1
Allmerica Asset Management 2,188.8 1,381.1 0.2 0.4
-------------- -------------- -------------- -----------
Subtotal 26,445.7 24,791.8 1,367.9 1,213.5
Corporate - - - -
-------------- -------------- -------------- -----------
Total $ 26,934.0 $ 25,333.8 $ 1,371.8 $ 1,219.5
============== ============== ============== ============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Litigation
In 1997, a lawsuit on behalf of a putative class was instituted against the
Company alleging fraud, unfair or deceptive acts, breach of contract,
misrepresentation, and related claims in the sale of life insurance policies. In
November 1998, the Company and the plaintiffs entered into a settlement
agreement and in May 1999, the Federal District Court in Worcester,
Massachusetts approved the settlement agreement and certified the class for this
purpose. FAFLIC recognized a $31.0 million pre-tax expense in 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 the Company's insurance carriers, and based on changes in the Company's
estimate of the ultimate cost of the benefits to be provided to members of the
class.
The Company has been named a defendant in various 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.
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SELECT
CORE INVESTMENT MONEY EQUITY GOVERNMENT
EQUITY GRADE INCOME MARKET INDEX BOND
---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ....................... $ 554 $ 285 $ 265 $ 598 $ 274
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 ....................... - - - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - - - -
Investments in shares of Warburg Pincus Trust ............................. - - - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - - - -
---------- ------------ ---------- ---------- ----------
Total assets ............................................................. 554 285 265 598 274
LIABILITIES: - - - - -
---------- ------------ ---------- ---------- ----------
Net assets ............................................................... $ 554 $ 285 $ 265 $ 598 $ 274
========== ============ ========== ========== ==========
Net asset distribution by category:
Variable life policies ................................................... $ - $ - $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... 554 285 265 598 274
---------- ------------ ---------- ---------- ----------
$ 554 $ 285 $ 265 $ 598 $ 274
========== ============ ========== ========== ==========
Units outstanding, September 30, 2000 ..................................... 200 200 200 200 200
Net asset value per unit, September 30, 2000 .............................. $ 2.769783 $ 1.423900 $ 1.332319 $ 2.988522 $ 1.368509
<CAPTION>
SELECT SELECT SELECT
AGGRESSIVE SELECT GROWTH VALUE
GROWTH GROWTH AND INCOME OPPORTUNITY
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ....................... $ 49,342 $ 654 $ 477 $ 66,436
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 ....................... - - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - - -
Investments in shares of Warburg Pincus Trust ............................. - - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - - -
---------- ---------- ---------- -----------
Total assets ............................................................. 49,342 654 477 66,436
LIABILITIES: - - - -
---------- ---------- ---------- -----------
Net assets ............................................................... $ 49,342 $ 654 $ 477 $ 66,436
========== ========== ========== ===========
Net asset distribution by category:
Variable life policies ................................................... $ 48,823 $ - $ - $ 65,995
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... 519 654 477 441
---------- ---------- ---------- -----------
$ 49,342 $ 654 $ 477 $ 66,436
========== ========== ========== ===========
Units outstanding, September 30, 2000 ..................................... 19,002 200 200 30,160
Net asset value per unit, September 30, 2000 .............................. $ 2.596721 $ 3.267607 $ 2.385206 $ 2.202800
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SELECT SELECT SELECT SELECT
INTERNATIONAL CAPITAL EMERGING STRATEGIC
EQUITY APPRECIATION MARKETS GROWTH
------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ....................... $ 407 $ 143,917 $ 35,513 $52,342
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 ....................... - - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - - -
Investments in shares of Warburg Pincus Trust ............................. - - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - - -
------------- ------------ --------- ---------
Total assets ............................................................. 407 143,917 35,513 52,342
LIABILITIES: - - - -
------------- ------------ --------- ---------
Net assets ............................................................... $ 407 $ 143,917 $ 35,513 $52,342
============= =========== ========= ========
Net asset distribution by category:
Variable life policies ................................................... $ - $ 143,917 $ 35,513 $52,342
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... 407 - - -
------------- ------------ --------- --------
$ 407 $ 143,917 $ 35,513 $52,342
============= =========== ========= ========
Units outstanding, September 30, 2000 ..................................... 200 52,047 50,083 50,092
Net asset value per unit, September 30, 2000 .............................. $ 2.033861 $ 2.765120 $0.709083 $1.044908
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH
-------------- ---------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ....................... $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) . 278 436 127,907
Investment in shares of T. Rowe Price International Series, Inc. .......... - - -
Investment in shares of Delaware Group Premium Fund ....................... - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - -
Investments in shares of Warburg Pincus Trust ............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - -
Investments in shares of J.P. Morgan Series Trust II ..................... - - -
-------------- ---------------- -------------
Total assets ......................................................... 278 436 127,907
LIABILITIES: - - -
-------------- ---------------- -------------
Net assets ............................................................ $ 278 $ 436 $ 127,907
============== ================ =============
Net asset distribution by category:
Variable life policies .................................................. $ - $ - $ 127,907
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... 278 436 -
-------------- ---------------- -------------
$ 278 $ 436 $ 127,907
============== ================ =============
Units outstanding, September 30, 2000 ..................................... 200 200 37,233
Net asset value per unit, September 30, 2000 .............................. $ 1.387485 $ 2.177723 $ 3.435258
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP II FIDELITY VIP II
OVERSEAS ASSET MANAGER CONTRAFUND (a)
------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ....................... $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) . 385 397 -
Investment in shares of T. Rowe Price International Series, Inc. .......... - - -
Investment in shares of Delaware Group Premium Fund ....................... - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - -
Investments in shares of Warburg Pincus Trust ............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - -
Investments in shares of J.P. Morgan Series Trust II ..................... - - -
------------- ----------------- -----------------
Total assets ......................................................... 385 397 -
LIABILITIES: - - -
------------- ----------------- -----------------
Net assets ............................................................ $ 385 $ 397 $ -
============= ================= =================
Net asset distribution by category:
Variable life policies .................................................. $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... 385 397 -
------------- ----------------- -----------------
$ 385 $ 397 $ -
============= ================= =================
Units outstanding, September 30, 2000 ..................................... 200 200 -
Net asset value per unit, September 30, 2000 .............................. $ 1.922573 $ 1.985909 $ 1.000000
<CAPTION>
T. ROWE PRICE DGPF
FIDELITY VIP II INTERNATIONAL GROWTH
INDEX 500(a) STOCK & INCOME(a)
--------------- ---------------- --------------
<S> <C> <C> <C>
ASSETS:
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. .......... - 43,014 -
Investment in shares of Delaware Group Premium Fund ....................... - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - -
Investments in shares of Warburg Pincus Trust ............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - -
Investments in shares of J.P. Morgan Series Trust II ..................... - - -
--------------- ---------------- --------------
Total assets ......................................................... - 43,014 -
LIABILITIES: - - -
--------------- ---------------- --------------
Net assets ............................................................ $ - $ 43,014 $ -
=============== ================ ==============
Net asset distribution by category:
Variable life policies .................................................. $ - $ 43,014 $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... - - -
--------------- ---------------- --------------
$ - $ 43,014 $ -
=============== ================ ==============
Units outstanding, September 30, 2000 ..................................... - 50,088 -
Net asset value per unit, September 30, 2000 .............................. $ 1.000000 $ 1.000000 $ 1.000000
</TABLE>
(a) For the period ended 9/30/2000, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DGPF DGPF
DGPF CAPITAL CASH
HIGH YIELD(a) RESERVES(a) RESERVES(a)
---------------- -------------- --------------
<S> <C> <C> <C>
ASSETS:
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 ....................... - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - -
Investments in shares of Warburg Pincus Trust ............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - -
Investments in shares of J.P. Morgan Series Trust II ..................... - - -
---------------- -------------- --------------
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, 2000 ..................................... - - -
Net asset value per unit, September 30, 2000 .............................. $ 1.000000 $ 1.000000 $ 1.000000
<CAPTION>
DGPF DGPF
GROWTH DGPF INTERNATIONAL
OPPORTUNITIES(a) BALANCED(a) EQUITY
------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS:
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 ....................... - - 334
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - - -
Investments in shares of Warburg Pincus Trust ............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - - -
Investment in shares of PIMCO Variable Insurance Trust .................... - - -
Investments in shares of J.P. Morgan Series Trust II ..................... - - -
------------- -------------- ---------------
Total assets ......................................................... - - 334
LIABILITIES: - - -
------------- -------------- ---------------
Net assets ............................................................ $ - $ - $ 334
============= ============== ===============
Net asset distribution by category:
Variable life policies .................................................. $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... - - 334
------------- -------------- ---------------
$ - $ - $ 334
============= ============== ===============
Units outstanding, September 30, 2000 ..................................... - - 200
Net asset value per unit, September 30, 2000 .............................. $ 1.000000 $ 1.000000 $ 1.670768
</TABLE>
(a) For the period ended 9/30/2000, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DGPF
SMALL CAP DGPF
VALUE(a) TREND(a)
------------- -------------
<S> <C> <C>
ASSETS:
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 ....................... - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) .... - -
Investments in shares of Goldman Sachs Variable Insurance Trust ........... - -
Investments in shares of Warburg Pincus Trust ............................. - -
Investments in shares of Deutsche Asset Management VIT Funds .............. - -
Investment in shares of PIMCO Variable Insurance Trust .................... - -
Investments in shares of J.P. Morgan Series Trust II ..................... - -
------------- -------------
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, 2000 ..................................... - -
Net asset value per unit, September 30, 2000 .............................. $ 1.000000 $ 1.000000
<CAPTION>
DGPF DGPF
STRATEGIC DGPF EMERGING
INCOME(a) DEVON(a) MARKETS(a)
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
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 ........................ - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) ..... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ............ - - -
Investments in shares of Warburg Pincus Trust .............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds ............... - - -
Investment in shares of PIMCO Variable Insurance Trust ..................... - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - -
------------- ------------- -------------
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, 2000 ...................................... - - -
Net asset value per unit, September 30, 2000 ............................... $ 1.000000 $ 1.000000 $ 1.000000
</TABLE>
(a) For the period ended 9/30/2000, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DGPF DGPF
SOCIAL DGPF SELECT
AWARENESS(a) REIT(a) GROWTH(a)
---------------- ------------- --------------
ASSETS:
<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 ........................ - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) ..... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ............ - - -
Investments in shares of Warburg Pincus Trust .............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds ............... - - -
Investment in shares of PIMCO Variable Insurance Trust ..................... - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - -
---------------- ------------- --------------
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, 2000 ...................................... - - -
Net asset value per unit, September 30, 2000 ............................... $ 1.000000 $ 1.000000 $ 1.000000
<CAPTION>
GOLDMAN
SACHS VIT
DGPF CORE LARGE
U.S. UIF CAP
GROWTH(a) TECHNOLOGY (a) GROWTH(a)
------------- ---------------- -----------------
<S> <C> <C> <C>
ASSETS:
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 ........................ - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) ..... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ............ - - -
Investments in shares of Warburg Pincus Trust .............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds ............... - - -
Investment in shares of PIMCO Variable Insurance Trust ..................... - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - -
------------- ---------------- -----------------
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, 2000 ...................................... - - -
Net asset value per unit, September 30, 2000 ............................... $ 1.000000 $ 1.000000 $ 1.000000
</TABLE>
(a) For the period ended 9/30/2000, there were no transactions.
The accompanying notes are an integral part of these financial statements.
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
September 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Alliance Alger Alger
Growth & Alliance American American
Income Technology Leveraged Small
Class B (a) Class B (a) AllCap (a) Capitalization (a)
------------- ------------- ------------ -------------------
<S> <C> <C> <C> <C>
ASSETS:
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. . . - - - -
Investments in shares of Delaware Group Premium Fund . . . . . . . . . - - - -
Investment in shares of The Universal Institutional Funds, Inc. (UIF) - - - -
Investments in shares of Goldman Sachs Variable Insurance Trust . . - - - -
Investments in shares of Warburg Pincus Trust . . . . . . . . . . . - - - -
Investments in shares of Deutsche Asset Management VIT Funds . . . . - - - -
Investment in shares of PIMCO Variable Insurance Trust . . . . . . . - - - -
Investment in shares of J.P. Morgan Series Trust II . . . . . . . . . - - - -
Investments in shares of AIM Variable Insurance Funds . . . . . . . . - - - -
Investments in shares of The Alger American Fund Portfolios . . . . . - - - -
Investments in shares of Alliance Variable Products Series Fund, Inc. - - - -
Investments in shares of Franklin Templeton Insurance Products Trust
(Class2). .......................................................... - - - -
------------- ------------- ------------ -------------------
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, 2000 . . . . . . . . . . . . . . . . - - - -
Net asset value per unit, September 30, 2000 . . . . . . . . . . . . . $ 1.000000 $ 1.000000 $ 1.000000 $ 1.000000
<CAPTION>
Templeton
AIM AIM AIM International
V.I. Growth (a) V.I. High Yield (a) V.I. Value (a) Securities (a)
---------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
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. . - - - -
Investments in shares of Delaware Group Premium Fund . . . . . . . . - - - -
Investment in shares of The Universal Institutional Funds, Inc. (UIF - - - -
Investments in shares of Goldman Sachs Variable Insurance Trust . - - - -
Investments in shares of Warburg Pincus Trust . . . . . . . . . . - - - -
Investments in shares of Deutsche Asset Management VIT Funds . . . - - - -
Investment in shares of PIMCO Variable Insurance Trust . . . . . . - - - -
Investment in shares of J.P. Morgan Series Trust II . . . . . . . . - - - -
Investments in shares of AIM Variable Insurance Funds . . . . . . . - - - -
Investments in shares of The Alger American Fund Portfolios . . . . - - - -
Investments in shares of Alliance Variable Products Series Fund, Inc - - - -
Investments in shares of Franklin Templeton Insurance Products Trust
(Class2). ........................................................ - - - -
------------ -------------- -------------- ---------------
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, 2000 . . . . . . . . . . . . . . . - - - -
Net asset value per unit, September 30, 2000 . . . . . . . . . . . . $ 1.000000 $ 1.000000 $ 1.000000 $ 1.000000
</TABLE>
(a) For the period ended 9/30/2000, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
GOLDMAN WARBURG
SACHS VIT GOLDMAN PINCUS
CORE SMALL SACHS VIT GLOBAL
CAP CAPITAL POST-VENTURE
EQUITY(a) GROWTH(a) CAPITAL (a)
------------------- ------------------- -------------
<S> <C> <C> <C>
ASSETS:
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 ........................ - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) ..... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ............ - - -
Investments in shares of Warburg Pincus Trust .............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds ............... - - -
Investment in shares of PIMCO Variable Insurance Trust ..................... - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - -
------------------- ------------------- -------------
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, 2000 ...................................... - - -
Net asset value per unit, September 30, 2000 ............................... $ 1.000000 $ 1.000000 $ 1.000000
WARBURG
PINCUS DEUTSCHE DEUTSCHE
SMALL SMALLL EQUITY
COMPANY CAP 500
GROWTH(a) INDEX (a) INDEX (a)
-------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS:
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 ........................ - - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) ..... - - -
Investments in shares of Goldman Sachs Variable Insurance Trust ............ - - -
Investments in shares of Warburg Pincus Trust .............................. - - -
Investments in shares of Deutsche Asset Management VIT Funds ............... - - -
Investment in shares of PIMCO Variable Insurance Trust ..................... - - -
Investments in shares of J.P. Morgan Series Trust II ...................... - - -
-------------- ------------- ---------------
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, 2000 ...................................... - - -
Net asset value per unit, September 30, 2000 ............................... $ 1.000000 $ 1.000000 $ 1.000000
<CAPTION>
PIMCO
TOTAL J.P. MORGAN
RETURN SMALL
BOND(a) COMPANY (a)
------------- -------------
<S> <C> <C>
ASSETS:
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 ........................ - -
Investments in shares of The Universal Institutional Funds, Inc. (UIF) ..... - -
Investments in shares of Goldman Sachs Variable Insurance Trust ............ - -
Investments in shares of Warburg Pincus Trust .............................. - -
Investments in shares of Deutsche Asset Management VIT Funds ............... - -
Investment in shares of PIMCO Variable Insurance Trust ..................... - -
Investments in shares of J.P. Morgan Series Trust II ...................... - -
------------- -------------
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, 2000 ...................................... - -
Net asset value per unit, September 30, 2000 ............................... $ 1.000000 $ 1.000000
</TABLE>
(a) For the period ended 9/30/2000, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CORE EQUITY
FOR THE
FOR THE YEAR ENDED
PERIOD DECEMBER 31,
ENDED ------------------------------
9/30/2000 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- ------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 2 $ 3 $ 4
-------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
-------------- ------------- -------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 2 3 4
-------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 55 45 4
Net realized gain (loss) from sales of investments ........ - - -
-------------- ------------- -------------
Net realized gain (loss) ................................ 55 45 4
Net unrealized gain (loss) ................................ (58) 78 61
-------------- ------------- -------------
Net realized and unrealized gain (loss) ................ (3) 123 65
-------------- ------------- -------------
Net increase (decrease) in net assets from operations .. $ (1) $ 126 $ 69
============== ============= =============
<CAPTION>
SELECT INVESTMENT GRADE INCOME
FOR THE
FOR THE YEAR ENDED
PERIOD DECEMBER 31,
ENDED -----------------------------
9/30/2000 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 13 $ 17 $ 15
-------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
-------------- ------------- --------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 13 17 15
-------------- ------------- --------------
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) ................................ 3 (19) 5
-------------- ------------- --------------
Net realized and unrealized gain (loss) ................ 3 (19) 5
-------------- ------------- --------------
Net increase (decrease) in net assets from operations .. $ 16 $ (2) $ 20
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
MONEY MARKET
FOR THE
FOR THE YEAR ENDED
PERIOD DECEMBER 31,
ENDED -----------------------------
9/30/2000 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- -------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 4,742 $ 12 $ 12
------------- -------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... 221 -
Administrative expense fees ............................... 61 -
------------- -------------- -------------
Total expenses .......................................... 282 - -
Net investment income (loss) .............................. 4,460 12 12
------------- -------------- -------------
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) ................................ - - -
------------- -------------- -------------
Net realized and unrealized gain (loss) ................ - - -
------------- -------------- -------------
Net increase (decrease) in net assets from operations .. $ 4,460 $ 12 $ 12
============= ============== =============
<CAPTION>
EQUITY INDEX
FOR THE
FOR THE YEAR ENDED
PERIOD DECEMBER 31,
ENDED -----------------------------
9/30/2000 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 4 $ 5 $ 5
------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... - -
Administrative expense fees ............................... - -
------------- ------------- -------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 4 5 5
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 60 1 12
Net realized gain (loss) from sales of investments ........ - - -
------------- ------------- -------------
Net realized gain (loss) ................................ 60 1 12
Net unrealized gain (loss) ................................ (72) 97 94
------------- ------------- -------------
Net realized and unrealized gain (loss) ................ (12) 98 106
------------- ------------- -------------
Net increase (decrease) in net assets from operations .. $ (8) $ 103 $ 111
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Government Bond
For the
For the Year Ended
Period December 31,
Ended ----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 11 $ 15 $ 14
------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
------------- ------------- -------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 11 15 14
------------- ------------- -------------
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) ................................ 4 (14) 4
------------- ------------- -------------
Net realized and unrealized gain (loss) ................ 4 (14) 4
------------- ------------- -------------
Net increase (decrease) in net assets from operations ... $ 15 $ 1 $ 18
============= ============= =============
<CAPTION>
Select Aggressive Growth
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- -------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ - $ - $ -
------------- -------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... 157 - -
Administrative expense fees ............................... 44 - -
------------- -------------- -------------
Total expenses .......................................... 201 - -
Net investment income (loss) .............................. (201) - -
------------- -------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 9,381 - -
Net realized gain (loss) from sales of investments ........ (470) - -
------------- -------------- -------------
Net realized gain (loss) ................................ 8,911 - -
Net unrealized gain (loss) ................................ (20,486) 150 37
------------- -------------- -------------
Net realized and unrealized gain (loss) ................ (11,575) 150 37
------------- -------------- -------------
Net increase (decrease) in net assets from operations ... $ (11,776) $ 150 $ 37
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Select Growth
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ - $ - $ -
-------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
-------------- ------------- -------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. - - -
-------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 77 18 4
Net realized gain (loss) from sales of investments ........ - - -
-------------- ------------- -------------
Net realized gain (loss) ................................ 77 18 4
Net unrealized gain (loss) ................................ (101) 137 133
-------------- ------------- -------------
Net realized and unrealized gain (loss) ................ (24) 155 137
-------------- ------------- -------------
Net increase (decrease) in net assets from operations ... $ (24) $ 155 $ 137
============== ============= =============
<CAPTION>
Select Growth and Income
For the
For the Year Ended
Period December 31,
Ended ----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 3 $ 5 $ 5
------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
------------- ------------- -------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 3 5 5
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 81 34 1
Net realized gain (loss) from sales of investments ........ - - -
------------- ------------- -------------
Net realized gain (loss) ................................ 81 34 1
Net unrealized gain (loss) ................................ (101) 37 53
------------- ------------- -------------
Net realized and unrealized gain (loss) ................ (20) 71 54
------------- ------------- -------------
Net increase (decrease) in net assets from operations ... $ (17) $ 76 $ 59
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Select Value Opportunity
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 212 $ - $ 3
------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... 171 - -
Administrative expense fees ............................... 47 - -
------------- ------------- -------------
Total expenses .......................................... 218 - -
Net investment income (loss) .............................. (6) - 3
------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 553 21 1
Net realized gain (loss) from sales of investments ........ 219 - -
------------- ------------- -------------
Net realized gain (loss) ................................ 772 21 1
Net unrealized gain (loss) ................................ 12,366 (38) 13
------------- ------------- -------------
Net realized and unrealized gain (loss) ................ 13,138 (17) 14
------------- ------------- -------------
Net increase (decrease) in net assets from operations ... $ 13,132 $ (17) $ 17
============= ============= =============
<CAPTION>
Select International Equity
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 2 $ - $ 4
-------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
-------------- ------------- --------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 2 - 4
-------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 14 - -
Net realized gain (loss) from sales of investments ........ - - -
-------------- ------------- --------------
Net realized gain (loss) ................................ 14 - -
Net unrealized gain (loss) ................................ (52) 107 43
-------------- ------------- --------------
Net realized and unrealized gain (loss) ................ (38) 107 43
-------------- ------------- --------------
Net increase (decrease) in net assets from operations ... $ (36) $ 107 $ 47
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Select
Select Capital Appreciation Emerging
For the Markets(a)
For the Year Ended For the
Period December 31, Period
Ended ---------------------------- Ended
9/30/2000 1999 1998 9/30/2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ - $ - $ - $ 58
------------- ------------ ------------ ---------------
EXPENSES:
Mortality and expense risk fees ........................... 410 - - 135
Administrative expense fees ............................... 114 - - 38
------------- ------------ ------------ ---------------
Total expenses .......................................... 524 - - 173
Net investment income (loss) .............................. (524) - - (115)
------------- ------------ ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 4,478 1 60 -
Net realized gain (loss) from sales of investments ........ (95) - - (266)
------------- ------------ ------------ ---------------
Net realized gain (loss) ................................ 4,383 1 60 (266)
Net unrealized gain (loss) ................................ 787 99 (12) (14,627)
------------- ------------ ------------ ---------------
Net realized and unrealized gain (loss) ................ 5,170 100 48 (14,893)
------------- ------------ ------------ ---------------
Net increase (decrease) in net assets from operations ... $ 4,646 $ 100 $ 48 $ (15,008)
============= ============ ============ ===============
<CAPTION>
Select
Strategic Fidelity VIP High Income
Growth(a) For the
For the For the Year Ended
Period Period December 31,
Ended Ended -----------------------------
9/30/2000 9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 3 $ 21 $ 26 $ 21
------------- -------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... 146 - - -
Administrative expense fees ............................... 40 - - -
------------- -------------- ------------- -------------
Total expenses .......................................... 186 - - -
Net investment income (loss) .............................. (183) 21 26 21
------------- -------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 433 - 1 13
Net realized gain (loss) from sales of investments ........ (45) - - -
------------- -------------- ------------- -------------
Net realized gain (loss) ................................ 388 - 1 13
Net unrealized gain (loss) ................................ 1,821 (50) (4) (47)
------------- -------------- ------------- -------------
Net realized and unrealized gain (loss) ................ 2,209 (50) (3) (34)
------------- -------------- ------------- -------------
Net increase (decrease) in net assets from operations ... $ 2,026 $ (29) $ 23 $ (13)
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Fidelity VIP Equity-Income
For the
For the Year Ended
Period December 31,
Ended ----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 7 $ 6 $ 5
------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
------------- ------------- --------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 7 6 5
------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 27 13 18
Net realized gain (loss) from sales of investments ........ - - -
------------- ------------- --------------
Net realized gain (loss) ................................ 27 13 18
Net unrealized gain (loss) ................................ (16) 6 18
------------- ------------- --------------
Net realized and unrealized gain (loss) ................ 11 19 36
------------- ------------- --------------
Net increase (decrease) in net assets from operations ... $ 18 $ 25 $ 41
============= ============= ==============
<CAPTION>
Fidelity VIP Growth
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- -------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 1 $ 1 $ 2
------------- -------------- -------------
EXPENSES:
Mortality and expense risk fees ........................... 395 - -
Administrative expense fees ............................... - - -
------------- -------------- -------------
Total expenses .......................................... 505 - -
Net investment income (loss) .............................. (504) 1 2
------------- -------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 73 55 47
Net realized gain (loss) from sales of investments ........ (130) - -
------------- -------------- -------------
Net realized gain (loss) ................................ (57) 55 47
Net unrealized gain (loss) ................................ (7,591) 129 90
------------- -------------- -------------
Net realized and unrealized gain (loss) ................ (7,648) 184 137
------------- -------------- -------------
Net increase (decrease) in net assets from operations ... $ (8,152) $ 185 $ 139
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-14
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Fidelity VIP Overseas
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 6 $ 5 $ 5
-------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
-------------- ------------- --------------
Total expenses .......................................... - - -
Net investment income (loss) .............................. 6 5 5
-------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 37 8 16
Net realized gain (loss) from sales of investments ........ - - -
-------------- ------------- --------------
Net realized gain (loss) ................................ 37 8 16
Net unrealized gain (loss) ................................ (95) 118 13
-------------- ------------- --------------
Net realized and unrealized gain (loss) ................ (58) 126 29
-------------- ------------- --------------
Net increase (decrease) in net assets from operations ... $ (52) $ 131 $ 34
============== ============= ==============
<CAPTION>
T. Rowe Price
Fidelity VIP II Asset Manager International
For the Stock
For the Year Ended For the
Period December 31, Period
Ended ------------------------------ Ended
9/30/2000 1999 1998 9/30/2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 13 $ 12 $ 10 $ -
---------------- ---------------- ------------- -----------------
EXPENSES:
Mortality and expense risk fees ........................... - - - 143
Administrative expense fees ............................... - - - 40
---------------- ---------------- ------------- -----------------
Total expenses .......................................... - - - 183
Net investment income (loss) .............................. 13 12 10 (183)
---------------- ---------------- ------------- -----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 29 15 30 -
Net realized gain (loss) from sales of investments ........ - - - (128)
---------------- ---------------- ------------- -----------------
Net realized gain (loss) ................................ 29 15 30 (128)
Net unrealized gain (loss) ................................ (43) 13 7 (7,075)
---------------- ---------------- ------------- -----------------
Net realized and unrealized gain (loss) ................ (14) 28 37 (7,203)
---------------- ---------------- ------------- -----------------
Net increase (decrease) in net assets from operations .. $ (1) $ 40 $ 47 $ (7,386)
================ ================ ============= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-15
<PAGE>
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
DGPF International Equity
For the
For the Year Ended
Period December 31,
Ended -----------------------------
9/30/2000 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 8 $ 7 $ 11
------------- ------------- --------------
EXPENSES:
Mortality and expense risk fees ........................... - - -
Administrative expense fees ............................... - - -
------------- ------------- --------------
Total expenses .......................................... -
Net investment income (loss) .............................. 8 7 11
------------- ------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors ....... 6 - -
Net realized gain (loss) from sales of investments ........ - - -
------------- ------------- --------------
Net realized gain (loss) ................................ 6 - -
Net unrealized gain (loss) ................................ (36) 42 18
------------- ------------- --------------
Net realized and unrealized gain (loss) ................ (30) 42 18
------------- ------------- --------------
Net increase (decrease) in net assets from operations .. $ (22) $ 49 $ 29
============= ============= ==============
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Core Equity
For the
For the Year Ended
Period December 31,
Ended -----------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
---------------- ------------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 2 $ 3 $ 4
Net realized gain (loss) ........................................... 55 45 4
Net unrealized gain (loss) ......................................... (58) 78 61
--------------- -------------- ------------
Net increase (decrease) in net assets from operations ............. (1) 126 69
--------------- -------------- ------------
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 .............................. (1) 126 69
NET ASSETS:
Beginning of period ................................................ 555 429 360
--------------- -------------- ------------
End of period ...................................................... $ 554 $ 555 $ 429
=============== ============== ============
<CAPTION>
Select Investment Grade Income
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 13 $ 17 $ 15
Net realized gain (loss) ........................................... - - -
Net unrealized gain (loss) ......................................... 3 (19) 5
-------------- ------------- --------------
Net increase (decrease) in net assets from operations ............. 16 (2) 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 .............................. 16 (2) 20
NET ASSETS:
Beginning of period ................................................ 269 271 251
-------------- ------------- --------------
End of period ...................................................... $ 285 $ 269 $ 271
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-17
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Money Market
For the
For the Year Ended
Period December 31,
Ended -------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 4,460 $ 12 $ $ 12
Net realized gain (loss) ........................................... - - -
Net unrealized gain (loss) ......................................... - - -
--------------- -------------- ---------------
Net increase (decrease) in net assets from operations ............. 4,460 12 12
--------------- -------------- ---------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... 520,962 - -
Terminations ....................................................... - - -
Insurance and other charges ........................................ (2,284) - -
Transfers between sub-accounts (including fixed account), net ...... (520,103) - -
Other transfers from (to) the General Account ...................... (3,024) - -
Net increase (decrease) in investment by Sponsor ................... - - -
--------------- -------------- ---------------
Net increase (decrease) in net assets from policy transactions ..... (4,449) - -
--------------- -------------- ---------------
Net increase (decrease) in net assets .............................. 11 12 12
NET ASSETS:
Beginning of period ................................................ 254 242 230
--------------- -------------- ---------------
End of period ...................................................... $ 265 $ 254 $ $ 242
=============== ============== ===============
<CAPTION>
Equity Index
For the
For the Year Ended
Period December 31,
Ended -------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 4 $ 5 $ 5
Net realized gain (loss) ........................................... 60 1 12
Net unrealized gain (loss) ......................................... (72) 97 94
--------------- -------------- ---------------
Net increase (decrease) in net assets from operations ............. (8) 103 111
--------------- -------------- ---------------
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 .............................. (8) 103 111
NET ASSETS:
Beginning of period ................................................ 606 503 392
--------------- -------------- ---------------
End of period ...................................................... $ 598 $ 606 $ 503
=============== ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Government Bond
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- -------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 11 $ 15 $ 14
Net realized gain (loss) ........................................... - - -
Net unrealized gain (loss) ......................................... 4 (14) 4
------------- ------------- ---------------
Net increase (decrease) in net assets from operations ............. 15 1 18
------------- ------------- ---------------
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 from policy transactions ..... 15 1 18
NET ASSETS:
Beginning of period ................................................ 259 258 240
------------- ------------- ---------------
End of period ...................................................... $ $ 274 $ 259 $ 258
============= ============= ===============
<CAPTION>
Select Aggressive Growth
For the
For the Year Ended
Period December 31,
Ended --------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (201) $ - $ -
Net realized gain (loss) ........................................... 8,911 - -
Net unrealized gain (loss) ......................................... (20,486) 150 37
--------------- --------------- ---------------
Net increase (decrease) in net assets from operations ............. (11,776) 150 37
--------------- --------------- ---------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... - - -
Terminations ....................................................... - - -
Insurance and other charges ........................................ (1,770) - -
Transfers between sub-accounts (including fixed account), net ...... 52,010 - -
Other transfers from (to) the General Account ...................... 10,340 - -
Net increase (decrease) in investment by Sponsor ................... - - -
--------------- --------------- ---------------
Net increase (decrease) in net assets from policy transactions ..... 60,580 - -
--------------- --------------- ---------------
Net increase (decrease) in net assets .............................. 48,804 150 37
NET ASSETS:
Beginning of period ................................................ 538 388 351
--------------- --------------- ---------------
End of period ...................................................... $ 49,342 $ 538 $ 388
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-19
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Select Growth
For the
For the Year Ended
Period December 31,
Ended -------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ - $ - $ -
Net realized gain (loss) ........................................... 77 18 4
Net unrealized gain (loss) ......................................... (101) 137 133
-------------- --------------- ---------------
Net increase (decrease) in net assets from operations ............. (24) 155 137
-------------- --------------- ---------------
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 .............................. (24) 155 137
NET ASSETS:
Beginning of period ................................................ 678 523 386
-------------- --------------- ---------------
End of period ...................................................... $ 654 $ 678 $ 523
=============== =============== ===============
<CAPTION>
Select Growth and Income
For the
For the Year Ended
Period December 31,
Ended -------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 3 $ 5 $ 5
Net realized gain (loss) ........................................... 81 34 1
Net unrealized gain (loss) ......................................... (101) 37 53
------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. (17) 76 59
------------- -------------- --------------
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 .............................. (17) 76 59
NET ASSETS:
Beginning of period ................................................ 494 418 359
------------- -------------- --------------
End of period ...................................................... $ 477 $ 494 $ 418
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Select Value Opportunity
For the
For the Year Ended
Period December 31,
Ended -------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (6) $ - $ 3
Net realized gain (loss) ........................................... 772 21 1
Net unrealized gain (loss) ......................................... 12,366 (38) 13
-------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. 13,132 (17) 17
-------------- -------------- --------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... - - -
Terminations ....................................................... - - -
Insurance and other charges ........................................ (2,028) - -
Transfers between sub-accounts (including fixed account), net ...... 52,010 - -
Other transfers from (to) the General Account ...................... 2,967 - -
Net increase (decrease) in investment by Sponsor ................... - - -
-------------- -------------- --------------
Net increase (decrease) in net assets from policy transactions ..... 52,949 - -
-------------- -------------- --------------
Net increase (decrease) in net assets .............................. 66,081 (17) 17
NET ASSETS:
Beginning of period ................................................ 355 372 355
-------------- -------------- --------------
End of period ...................................................... $ 66,436 $ 355 $ 372
============== ============== ==============
<CAPTION>
Select International Equity
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 2 $ - $ 4
Net realized gain (loss) ........................................... 14 - -
Net unrealized gain (loss) ......................................... (52) 107 43
-------------- ------------- --------------
Net increase (decrease) in net assets from operations ............. (36) 107 47
-------------- ------------- --------------
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 .............................. (36) 107 47
NET ASSETS:
Beginning of period ................................................ 443 336 289
-------------- ------------- --------------
End of period ...................................................... $ 407 $ 443 $ 336
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-21
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Select Capital Appreciation
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- ------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (524) $ - $ -
Net realized gain (loss) ........................................... 4,383 1 60
Net unrealized gain (loss) ......................................... 787 99 (12)
--------------- ------------- --------------
Net increase (decrease) in net assets from operations ............. 4,646 100 48
--------------- ------------- --------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... - - -
Terminations ....................................................... - - -
Insurance and other charges ........................................ (4,763) - -
Transfers between sub-accounts (including fixed account), net ...... 130,025 - -
Other transfers from (to) the General Account ...................... 14,054 - -
Net increase (decrease) in investment by Sponsor ................... (539) - -
--------------- ------------- --------------
Net increase (decrease) in net assets from policy transactions ..... 138,777 - -
--------------- ------------- --------------
Net increase (decrease) in net assets .............................. 143,423 100 48
NET ASSETS:
Beginning of period ................................................ 494 394 346
--------------- ------------- --------------
End of period ...................................................... $ $ 143,917 $ 494 $ $ 394
=============== ============= ==============
<CAPTION>
Select Select
Emerging Strategic
Markets(a) Growth(a)
For the For the
Period Period
Ended Ended
09/30/00 09/30/00
(Unaudited) (Unaudited)
-------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (116) $ (183)
Net realized gain (loss) ........................................... (266) 388
Net unrealized gain (loss) ......................................... (14,627) 1,821
-------------- -------------
Net increase (decrease) in net assets from operations ............. (15,008) 2,026
-------------- -------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... - -
Terminations ....................................................... - -
Insurance and other charges ........................................ (1,500) (1,697)
Transfers between sub-accounts (including fixed account), net ...... 52,010 52,010
Other transfers from (to) the General Account ...................... 11 3
Net increase (decrease) in investment by Sponsor ................... - -
-------------- -------------
Net increase (decrease) in net assets from policy transactions ..... 50,521 50,316
-------------- -------------
Net increase (decrease) in net assets .............................. 35,513 52,342
NET ASSETS:
Beginning of period ................................................ - -
-------------- -------------
End of period ...................................................... $ 35,513 $ 52,342
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-22
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Fidelity VIP High Income
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 21 $ 26 $ 21
Net realized gain (loss) ........................................... - 1 13
Net unrealized gain (loss) ......................................... (50) (4) (47)
-------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. (29) 23 (13)
-------------- -------------- --------------
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 .............................. (29) 23 (13)
NET ASSETS:
Beginning of period ................................................ 307 284 297
-------------- -------------- --------------
End of period ...................................................... $ 278 $ 307 $ 284
============== ============== ==============
<CAPTION>
Fidelity VIP Equity-Income
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- -------------- -------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 7 $ 6 $ 5
Net realized gain (loss) ........................................... 27 13 18
Net unrealized gain (loss) ......................................... (16) 6 18
-------------- -------------- -------------
Net increase (decrease) in net assets from operations ............. 18 25 41
-------------- -------------- -------------
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 .............................. 18 25 41
NET ASSETS:
Beginning of period ................................................ 418 393 352
-------------- -------------- -------------
End of period ...................................................... $ 436 $ 418 $ 393
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-23
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Fidelity VIP Growth
For the
For the Year Ended
Period December 31,
Ended --------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
-------------- --------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (504) $ 1 $ 2
Net realized gain (loss) ........................................... (57) 55 47
Net unrealized gain (loss) ......................................... (7,591) 129 90
-------------- ---------------- ---------------
Net increase (decrease) in net assets from operations ............. (8,152) 185 139
-------------- ---------------- ---------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... - - -
Terminations ....................................................... - - -
Insurance and other charges ........................................ (4,554) - -
Transfers between sub-accounts (including fixed account), net ...... 130,026 - -
Other transfers from (to) the General Account ...................... 10,625 - -
Net increase (decrease) in investment by Sponsor ................... (715) - -
-------------- ---------------- ---------------
Net increase (decrease) in net assets from policy transactions ..... 135,382 - -
-------------- ---------------- ---------------
Net increase (decrease) in net assets .............................. 127,230 185 139
NET ASSETS:
Beginning of period ................................................ 677 492 353
-------------- ---------------- ---------------
End of period ...................................................... $ 127,907 $ 677 $ 492
============== ================ ===============
<CAPTION>
Fidelity VIP Overseas
For the
For the Year Ended
Period December 31,
Ended ------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
------------- ------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 6 $ 5 $ 5
Net realized gain (loss) ........................................... 37 8 16
Net unrealized gain (loss) ......................................... (95) 118 13
------------- -------------- --------------
Net increase (decrease) in net assets from operations ............. (52) 131 34
------------- -------------- --------------
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 .............................. (52) 131 34
NET ASSETS:
Beginning of period ................................................ 437 306 272
------------- -------------- --------------
End of period ...................................................... $ 385 $ 437 $ 306
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-24
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
Fidelity VIP II Asset Manager
For the For the
Period Year Ended
Ended December 31,
-------------------------------
09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited)
----------- -------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ 13 $ 12 $ 10
Net realized gain (loss) ........................................... 29 15 30
Net unrealized gain (loss) ......................................... (43) 13 7
---------- -------------- --------------
Net increase (decrease) in net assets from operations ............. (1) 40 47
---------- -------------- --------------
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 .............................. (1) 40 47
NET ASSETS:
Beginning of period ................................................ 398 358 311
---------- -------------- --------------
End of period ...................................................... $ 397 $ 398 $ 358
========== ============== ==============
<CAPTION>
T. Rowe Price
International DGPF International Equity
Stock For the
For the For the Year Ended
Period Period December 31,
Ended Ended ----------------------------
09/30/00 09/30/00 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................... $ (183) $ 8 $ 7 $ 11
Net realized gain (loss) ........................................... (128) 6 - -
Net unrealized gain (loss) ......................................... (7,075) (36) 42 18
------------ ------------ -------------- --------------
Net increase (decrease) in net assets from operations ............. (7,386) (22) 49 29
------------ ------------ -------------- --------------
FROM POLICY TRANSACTIONS:
Net premiums ....................................................... - - - -
Terminations ....................................................... - - - -
Insurance and other charges ........................................ (1,620) - - -
Transfers between sub-accounts (including fixed account), net ...... 52,011 - - -
Other transfers from (to) the General Account ...................... 9 - - -
Net increase (decrease) in investment by Sponsor ................... - - - -
------------ ------------ -------------- --------------
Net increase (decrease) in net assets from policy transactions ..... 50,400 - - -
------------ ------------ -------------- --------------
Net increase (decrease) in net assets .............................. 43,014 (22) 49 29
NET ASSETS:
Beginning of period ................................................ - 356 307 278
------------ ------------ -------------- --------------
End of period ...................................................... $ 43,014 $ 334 $ 356 $ 307
============ ============ ============== ==============
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-25
<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 insurance 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
fifty-five 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), an indirect
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), 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.; and of The Delaware Group Premium Fund
(DGPF) managed by Delaware Management Company or Delaware International Advisers
Ltd.; or of the The Universal Institutional Funds, Inc. (UIF) managed by Morgan
Stanley; or of the Goldman Sachs Variable Insurance Trust (Goldman) managed by
Goldman Sachs Asset Management; or of Warburg Pincus Trust (Warburg) managed by
Credit Suisse Asset Management, LLC; or of Deutsche Asset Management VIT Funds
(Deutsche) managed by Bankers Trust Company; or of PIMCO Variable
Insurance Trust (PIMCO) managed by Pacific Investment Management Co.; or of J.P.
Morgan Series Trust II (J.P. Morgan) managed by J.P. Morgan Investment
Management Inc.; or of AIM Variable Insurance Funds (AVIF) managed by A I M
Advisors, Inc.; or of The Alger American Fund (Alger) managed by Fred Alger
Management, Inc.; or of Alliance Variable Products Series Fund (Alliance),
managed by Alliance Capital Managment, L.P.; or of Franklin Templeton Variable
Insurance Products Trust (FT VIP) managed by Templeton Investment Counsel, Inc.
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price, DGPF, UIF, Goldman,
Warburg, Deutsche, PIMCO, J. P. Morgan, AVIF, Alger, Alliance, and FT VIP (the
Funds) are open-end, management investment companies registered under the 1940
Act.
Effective May 1, 2000, AIT Investment Grade Income Fund was renamed
Select Investment Grade Income Fund, AIT Growth Fund was renamed Core Equity
Fund, DelCap was renamed Growth Opportunities, Aggressive Growth was renamed
Select Growth, Delchester was renamed High Yield, and Delaware Balanced was
renamed Balanced.
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-26
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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 (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $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>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</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) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</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) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
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)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
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 services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). 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.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for 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,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance 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 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.
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at 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 the
foreign currency exchange risk associated with investment securities 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 associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. 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
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6.0%
for life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life, variable universal life and variable annuities include deposits
received from customers and investment earnings on their fund balances, less
administrative charges. Universal life fund balances are also assessed mortality
and surrender charges. Liabilities for variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
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.
Premiums for property and casualty 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 ("GICs"),
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 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 include annuity benefit claims in excess of a
guaranteed minimum fund value, and net investment income credited to the fund
values after deduction for investment and risk charges. Revenues for universal
life products consist of net investment income, with mortality, administration
and surrender charges assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Certain policy charges
that represent compensation for services
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life 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.
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, 2000. 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 of 1998, 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
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the assessment liability or paid assessment that can be recovered through
premium tax offsets or policy surcharges. This statement is effective for fiscal
years beginning after December 15, 1998. The adoption of this statement did not
have a material effect on the results of operations or financial position of the
Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. 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 (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted Statement No. 130
for the first quarter of 1998, which resulted primarily in reporting unrealized
gains and losses on investments in debt and equity securities in comprehensive
income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. 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
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recorded a $30.5 million loss, net of taxes, on the disposal of its group life
and health business. Subsequent to the June 30, 1999 measurement date,
operations from the discontinued business generated losses of approximately $8.7
million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company'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. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization 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 Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
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 Corporation 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..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty 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 $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, 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, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company'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.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of 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 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. 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 recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
6. 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>
1999
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<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>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</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>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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>
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>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans 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 $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. 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 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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) 1999 1998
------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
-- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1999, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
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
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific 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 $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, 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") and other funding agreements. The
Company is exposed to interest rate risk from the time of sale of the GIC until
the receipt of the deposit and purchase of the underlying asset to back the
liability. The Company 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 was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not 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 $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
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 losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</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.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities 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 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 $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. 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 1999, 1998 and 1997. 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 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
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. 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, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, 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 hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. 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 insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, 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 its
counterparties and the underlying companies in default swap contracts, 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, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. 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 on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
------------- ------------- ------ ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. 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 $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
F-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 is
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. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values 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.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4 and $399.1
respectively).......................................................... $372.9 $414.2
Mortgage loans........................................................... 136.3 136.0
Policy loans............................................................. 201.1 210.9
Cash and cash equivalents................................................ 22.6 9.4
Accrued investment income................................................ 14.0 14.1
Deferred policy acquisition costs........................................ 13.1 15.6
Other assets............................................................. 12.3 2.9
------ ------
Total assets............................................................... $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals.......................................... $835.2 $862.9
Other liabilities........................................................ 6.9 9.1
------ ------
Total liabilities.......................................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................................ $ 52.1 $ 55.4 $ 58.3
Net investment income.................................................... 53.8 53.3 53.4
Realized investment (loss) gain.......................................... (0.6) 0.1 1.3
------ ------ ------
Total revenues............................................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits.......................................................... 88.9 95.0 100.5
Policy acquisition expenses.............................................. 2.5 2.7 3.0
Other operating expenses................................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................................ 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block......................................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, 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.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999, there was no commercial
paper outstanding.
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. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. 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) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory 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) 1999 1998 1997
------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 1999 1998
------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
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, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("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 1994. 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.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1999, 1998 and 1997 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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
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 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
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 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies 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.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
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
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 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, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. 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 postretirement medical and death
benefits plans previously provided by the affiliated Companies 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.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
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 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
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 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, 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.
In 1999, the Company reorganized its Property and Casualty business 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 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 discussed in Note 3. 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 GICs such as the
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 the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 -- $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 million thereafter. It is
expected that, in the normal course of business, leases that expire will be
renewed or replaced by leases on other property and equipment; thus, it is
anticipated that future minimum lease commitments will not be less than the
amounts shown for 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses 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 Statement of Financial
Accounting Standards 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.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, 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"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded 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 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) 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-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
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...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
19. 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
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's 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 Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company 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,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. 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.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. 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. 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. 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, 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,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
22. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, 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. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
23. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
During the second quarter of 2000, AFC adopted a formal company-wide
restructuring plan. This plan is the result of a corporate initiative that began
in the fall of 1999, intended to reduce expenses and enhance revenues. As a
result of this restructuring plan, FAFLIC recognized a pre-tax restructuring
charge of $11.0 million for the quarter ended June 30, 2000. Approximately
$1.9 million of this charge relates to severance and other employee related
costs resulting from the elimination of positions. All levels of employees, from
staff to senior management, were affected by the restructuring. In addition,
approximately $9.1 million of this charge relates to other restructuring costs,
including one-time project costs.
F-45
<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 of 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, 1999, 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 accounting principles generally accepted in the
United States. These financial statements are the responsibility of First
Allmerica Financial Life Insurance Company; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 1999 by correspondence with the Funds, provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT
INVESTMENT MONEY EQUITY GOVERNMENT AGGRESSIVE SELECT
GROWTH GRADE INCOME MARKET INDEX BOND GROWTH GROWTH
--------- ------------- --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust................. $ 555 $ 269 $ 254 $ 606 $ 259 $ 538 $ 678
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............... -- -- -- -- -- -- --
Investments in shares of Mutual
Fund Variable Annuity
Trust (MFVAT).................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total assets..................... 555 269 254 606 259 538 678
LIABILITIES: -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net assets....................... $ 555 $ 269 $ 254 $ 606 $ 259 $ 538 $ 678
========= ========= ========= ========= ========= ========= =========
Net asset distribution by category:
Variable life policies........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Value of investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. 555 269 254 606 259 538 678
--------- --------- --------- --------- --------- --------- ---------
$ 555 $ 269 $ 254 $ 606 $ 259 $ 538 $ 678
========= ========= ========= ========= ========= ========= =========
Units outstanding, December 31,
1999............................. 200 200 200 200 200 200 200
Net asset value per unit,
December 31, 1999................ $2.775324 $1.343406 $1.271987 $3.030118 $1.292948 $2.688321 $3.391320
<CAPTION>
SELECT SELECT
GROWTH SELECT VALUE INTERNATIONAL
AND INCOME OPPORTUNITY EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust................. $ 494 $ 355 $ 443
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............... -- -- --
Investments in shares of Mutual
Fund Variable Annuity
Trust (MFVAT).................... -- -- --
--------- --------- ---------
Total assets..................... 494 355 443
LIABILITIES: -- -- --
--------- --------- ---------
Net assets....................... $ 494 $ 355 $ 443
========= ========= =========
Net asset distribution by category:
Variable life policies........... $ -- $ -- $ --
Value of investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. 494 355 443
--------- --------- ---------
$ 494 $ 355 $ 443
========= ========= =========
Units outstanding, December 31,
1999............................. 200 200 200
Net asset value per unit,
December 31, 1999................ $2.472360 $1.773597 $2.213318
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT SELECT
CAPITAL EMERGING STRATEGIC FIDELITY VIP FIDELITY VIP
APPRECIATION MARKETS(A) GROWTH(A) HIGH INCOME EQUITY-INCOME
------------ ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust....... $ 494 $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable Insurance
Products
Funds (VIP)............................................. -- -- -- 307 418
Investment in shares of T. Rowe Price International
Series, Inc............................................. -- -- -- -- --
Investment in shares of Delaware Group Premium Fund....... -- -- -- -- --
Investments in shares of Mutual Fund Variable Annuity
Trust (MFVAT)........................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total assets............................................ 494 -- -- 307 418
LIABILITIES: -- -- -- -- --
--------- --------- --------- --------- ---------
Net assets.............................................. $ 494 $ -- $ -- $ 307 $ 418
========= ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................................. $ -- $ -- $ -- $ -- $ --
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor)........................... 494 -- -- 307 418
--------- --------- --------- --------- ---------
$ 494 $ -- $ -- $ 307 $ 418
========= ========= ========= ========= =========
Units outstanding, December 31, 1999...................... 200 -- -- 200 200
Net asset value per unit, December 31, 1999............... $2.472363 $1.000000 $1.000000 $1.536249 $2.088724
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP II FIDELITY VIP II
GROWTH OVERSEAS ASSET MANAGER INDEX 500(A)
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust....... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable Insurance
Products Funds (VIP).................................. 677 437 398 --
Investment in shares of T. Rowe Price International
Series, Inc............................................. -- -- -- --
Investment in shares of Delaware Group Premium Fund....... -- -- -- --
Investments in shares of Mutual Fund Variable Annuity
Trust (MFVAT)........................................... -- -- -- --
--------- --------- --------- ---------
Total assets............................................ 677 437 398 --
LIABILITIES: -- -- -- --
--------- --------- --------- ---------
Net assets.............................................. $ 677 $ 437 $ 398 $ --
========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................................. $ -- $ -- $ -- $ --
Value of investment by First Allmerica Financial Life
Insurance Company (Sponsor)........................... 677 437 398 --
--------- --------- --------- ---------
$ 677 $ 437 $ 398 $ --
========= ========= ========= =========
Units outstanding, December 31, 1999...................... 200 200 200 --
Net asset value per unit, December 31, 1999............... $3.383657 $2.183371 $1.987615 $1.000000
<CAPTION>
T. ROWE PRICE
INTERNATIONAL
STOCK(A)
-------------
<S> <C>
ASSETS:
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....... --
Investments in shares of Mutual Fund Variable Annuity
Trust (MFVAT)........................................... --
---------
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, December 31, 1999...................... --
Net asset value per unit, December 31, 1999............... $1.000000
</TABLE>
(a) For the period ended 12/31/99, 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)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DGPF DGPF DGPF DGPF
GROWTH & DGPF CAPITAL CASH DGPF DELAWARE
INCOME(A) DELCHESTER(A) RESERVES(A) RESERVES(A) DELCAP(A) BALANCED(A)
------------ ------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
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............... -- -- -- -- -- --
Investments in shares of Mutual
Fund Variable Annuity
Trust (MFVAT).................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
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, December 31,
1999............................. -- -- -- -- -- --
Net asset value per unit,
December 31, 1999................ $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
<CAPTION>
DGPF DGPF DGPF
INTERNATIONAL SMALL CAP DGPF STRATEGIC
EQUITY VALUE(A) TREND(A) INCOME(A)
------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
ASSETS:
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............... 356 -- -- --
Investments in shares of Mutual
Fund Variable Annuity
Trust (MFVAT).................... -- -- -- --
--------- --------- --------- ---------
Total assets..................... 356 -- -- --
LIABILITIES: -- -- -- --
--------- --------- --------- ---------
Net assets....................... $ 356 $ -- $ -- $ --
========= ========= ========= =========
Net asset distribution by category:
Variable life policies........... $ -- $ -- $ -- $ --
Value of investment by First
Allmerica Financial Life
Insurance
Company (Sponsor).............. 356 -- -- --
--------- --------- --------- ---------
$ 356 $ -- $ -- $ --
========= ========= ========= =========
Units outstanding, December 31,
1999............................. 200 -- -- --
Net asset value per unit,
December 31, 1999................ $1.777906 $1.000000 $1.000000 $1.000000
</TABLE>
(a) For the period ended 12/31/99, 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)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DGPF DGPF
DGPF EMERGING DGPF SOCIAL DGPF AGGRESSIVE
DEVON(A) MARKETS(A) AWARENESS(A) REIT(A) GROWTH(A)
--------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
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...... -- -- -- -- --
Investments in shares of Mutual Fund Variable Annuity
Trust (MFVAT).......................................... -- -- -- -- --
--------- --------- --------- --------- ---------
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, December 31, 1999..................... -- -- -- -- --
Net asset value per unit, December 31, 1999.............. $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
<CAPTION>
MFVAT
U.S. MFVAT MFVAT MFVAT
DGPF U.S. GOVERNMENT ASSET GROWTH CAPITAL
GROWTH(A) INCOME(A) ALLOCATION(A) & INCOME(A) GROWTH(A)
------------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
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...... -- -- -- -- --
Investments in shares of Mutual Fund Variable Annuity
Trust (MFVAT).......................................... -- -- -- -- --
--------- --------- --------- --------- ---------
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, December 31, 1999..................... -- -- -- -- --
Net asset value per unit, December 31, 1999.............. $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
<CAPTION>
MFVAT
INTERNATIONAL
EQUITY(A)
-------------
<S> <C>
ASSETS:
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...... --
Investments in shares of Mutual Fund Variable Annuity
Trust (MFVAT).......................................... --
---------
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, December 31, 1999..................... --
Net asset value per unit, December 31, 1999.............. $1.000000
</TABLE>
(a) For the period ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INVESTMENT GRADE
GROWTH INCOME
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 3 $ 4 $ 6 $ 17 $15 $15
---- --- --- ---- --- ---
Net investment income (loss)..... 3 4 6 17 15 15
---- --- --- ---- --- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 45 4 58 -- -- --
Net realized gain (loss) from
sales of investments........... -- -- -- -- -- --
---- --- --- ---- --- ---
Net realized gain (loss)....... 45 4 58 -- -- --
Net unrealized gain (loss)....... 78 61 9 (19) 5 6
---- --- --- ---- --- ---
Net realized and unrealized
gain (loss)................... 123 65 67 (19) 5 6
---- --- --- ---- --- ---
Net increase (decrease) in net
assets from operations........ $126 $69 $73 $ (2) $20 $21
==== === === ==== === ===
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $12 $12 $12 $ 5 $ 5 $ 4
--- --- --- ---- ---- ---
Net investment income (loss)..... 12 12 12 5 5 4
--- --- --- ---- ---- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- -- 1 12 11
Net realized gain (loss) from
sales of investments........... -- -- -- -- -- --
--- --- --- ---- ---- ---
Net realized gain (loss)....... -- -- -- 1 12 11
Net unrealized gain (loss)....... -- -- -- 97 94 81
--- --- --- ---- ---- ---
Net realized and unrealized
gain (loss)................... -- -- -- 98 106 92
--- --- --- ---- ---- ---
Net increase (decrease) in net
assets from operations........ $12 $12 $12 $103 $111 $96
=== === === ==== ==== ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT AGGRESSIVE
GOVERNMENT BOND GROWTH
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ 15 $14 $13 $ -- $-- $--
---- --- --- ---- --- ---
Net investment income (loss)..... 15 14 13 -- -- --
---- --- --- ---- --- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- -- -- -- 29
Net realized gain (loss) from
sales of investments........... -- -- -- -- -- --
---- --- --- ---- --- ---
Net realized gain (loss)....... -- -- -- -- -- 29
Net unrealized gain (loss)....... (14) 4 3 150 37 27
---- --- --- ---- --- ---
Net realized and unrealized
gain (loss)................... (14) 4 3 150 37 56
---- --- --- ---- --- ---
Net increase (decrease) in net
assets from operations........ $ 1 $18 $16 $150 $37 $56
==== === === ==== === ===
<CAPTION>
SELECT GROWTH AND
SELECT GROWTH INCOME
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ -- $ -- $ 1 $ 5 $ 5 $ 4
---- ---- --- --- --- ---
Net investment income (loss)..... -- -- 1 5 5 4
---- ---- --- --- --- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 18 4 20 34 1 31
Net realized gain (loss) from
sales of investments........... -- -- -- -- -- --
---- ---- --- --- --- ---
Net realized gain (loss)....... 18 4 20 34 1 31
Net unrealized gain (loss)....... 137 133 77 37 53 31
---- ---- --- --- --- ---
Net realized and unrealized
gain (loss)................... 155 137 97 71 54 62
---- ---- --- --- --- ---
Net increase (decrease) in net
assets from operations........ $155 $137 $98 $76 $59 $66
==== ==== === === === ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE SELECT INTERNATIONAL
OPPORTUNITY EQUITY
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ -- $ 3 $ 2 $ -- $ 4 $ 7
---- --- --- ---- --- ---
Net investment income (loss)..... -- 3 2 -- 4 7
---- --- --- ---- --- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 21 1 47 -- -- 9
Net realized gain (loss) from
sales of investments........... -- -- -- -- -- --
---- --- --- ---- --- ---
Net realized gain (loss)....... 21 1 47 -- -- 9
Net unrealized gain (loss)....... (38) 13 22 107 43 (3)
---- --- --- ---- --- ---
Net realized and unrealized
gain (loss)................... (17) 14 69 107 43 6
---- --- --- ---- --- ---
Net increase (decrease) in net
assets from operations........ $(17) $17 $71 $107 $47 $13
==== === === ==== === ===
<CAPTION>
SELECT CAPITAL FIDELITY VIP HIGH
APPRECIATION INCOME
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
-------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends........................ $ -- $ -- $ -- $26 $ 21 $18
---- ----------- ---------- --- ---- ---
Net investment income (loss)..... -- -- -- 26 21 18
---- ----------- ---------- --- ---- ---
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 1 60 -- 1 13 2
Net realized gain (loss) from
sales of investments........... -- -- -- -- -- --
---- ----------- ---------- --- ---- ---
Net realized gain (loss)....... 1 60 -- 1 13 2
Net unrealized gain (loss)....... 99 (12) 43 (4) (47) 25
---- ----------- ---------- --- ---- ---
Net realized and unrealized
gain (loss)................... 100 48 43 (3) (34) 27
---- ----------- ---------- --- ---- ---
Net increase (decrease) in net
assets from operations........ $100 $ 48 $ 43 $23 $(13) $45
==== =========== ========== === ==== ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP
EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 6 $ 5 $ 4 $ 1 $ 2 $ 1
--- --- --- ---- ---- ----
Net investment income (loss).............................. 6 5 4 1 2 1
--- --- --- ---- ---- ----
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors....... 13 18 24 55 47 9
Net realized gain (loss) from sales of investments........ -- -- -- -- -- --
--- --- --- ---- ---- ----
Net realized gain (loss)................................ 13 18 24 55 47 9
Net unrealized gain (loss)................................ 6 18 49 129 90 57
--- --- --- ---- ---- ----
Net realized and unrealized gain (loss)................. 19 36 73 184 137 66
--- --- --- ---- ---- ----
Net increase (decrease) in net assets from operations... $25 $41 $77 $185 $139 $ 67
=== === === ==== ==== ====
<CAPTION>
FIDELITY VIP FIDELITY VIP II ASSET
OVERSEAS MANAGER
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 5 $ 5 $ 5 $12 $10 $ 8
---- --- --- --- --- ---
Net investment income (loss).............................. 5 5 5 12 10 8
---- --- --- --- --- ---
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors....... 8 16 17 15 30 23
Net realized gain (loss) from sales of investments........ -- -- -- -- -- --
---- --- --- --- --- ---
Net realized gain (loss)................................ 8 16 17 15 30 23
Net unrealized gain (loss)................................ 118 13 7 13 7 22
---- --- --- --- --- ---
Net realized and unrealized gain (loss)................. 126 29 24 28 37 45
---- --- --- --- --- ---
Net increase (decrease) in net assets from operations... $131 $34 $29 $40 $47 $53
==== === === === === ===
<CAPTION>
DGPF INTERNATIONAL
EQUITY
FOR THE
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 7 $11 $ 9
--- --- ---
Net investment income (loss).............................. 7 11 9
--- --- ---
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)................................ 42 18 8
--- --- ---
Net realized and unrealized gain (loss)................. 42 18 8
--- --- ---
Net increase (decrease) in net assets from operations... $49 $29 $17
=== === ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT GRADE
GROWTH INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 3 $ 4 $ 6 $ 17 $ 15 $ 15
Net realized gain (loss)....... 45 4 58 -- -- --
Net unrealized gain (loss)..... 78 61 9 (19) 5 6
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from operations........ 126 69 73 (2) 20 21
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from policy
transactions.................. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets........................ 126 69 73 (2) 20 21
NET ASSETS:
Beginning of year................ 429 360 287 271 251 230
---- ---- ---- ---- ---- ----
End of year...................... $555 $429 $360 $269 $271 $251
==== ==== ==== ==== ==== ====
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 12 $ 12 $ 12 $ 5 $ 5 $ 4
Net realized gain (loss)....... -- -- -- 1 12 11
Net unrealized gain (loss)..... -- -- -- 97 94 81
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from operations........ 12 12 12 103 111 96
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from policy
transactions.................. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets........................ 12 12 12 103 111 96
NET ASSETS:
Beginning of year................ 242 230 218 503 392 296
---- ---- ---- ---- ---- ----
End of year...................... $254 $242 $230 $606 $503 $392
==== ==== ==== ==== ==== ====
</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)
<TABLE>
<CAPTION>
SELECT AGGRESSIVE
GOVERNMENT BOND GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 15 $ 14 $ 13 $ -- $ -- $ --
Net realized gain (loss)....... -- -- -- -- -- 29
Net unrealized gain (loss)..... (14) 4 3 150 37 27
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from operations........ 1 18 16 150 37 56
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from policy
transactions.................. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets........................ 1 18 16 150 37 56
NET ASSETS:
Beginning of year................ 258 240 224 388 351 295
---- ---- ---- ---- ---- ----
End of year...................... $259 $258 $240 $538 $388 $351
==== ==== ==== ==== ==== ====
<CAPTION>
SELECT GROWTH AND
SELECT GROWTH INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ -- $ -- $ 1 $ 5 $ 5 $ 4
Net realized gain (loss)....... 18 4 20 34 1 31
Net unrealized gain (loss)..... 137 133 77 37 53 31
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from operations........ 155 137 98 76 59 66
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from policy
transactions.................. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets........................ 155 137 98 76 59 66
NET ASSETS:
Beginning of year................ 523 386 288 418 359 293
---- ---- ---- ---- ---- ----
End of year...................... $678 $523 $386 $494 $418 $359
==== ==== ==== ==== ==== ====
</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)
<TABLE>
<CAPTION>
SELECT VALUE SELECT INTERNATIONAL
OPPORTUNITY EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ -- $ 3 $ 2 $ -- $ 4 $ 7
Net realized gain (loss)....... 21 1 47 -- -- 9
Net unrealized gain (loss)..... (38) 13 22 107 43 (3)
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from operations........ (17) 17 71 107 47 13
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from policy
transactions.................. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets........................ (17) 17 71 107 47 13
NET ASSETS:
Beginning of year................ 372 355 284 336 289 276
---- ---- ---- ---- ---- ----
End of year...................... $355 $372 $355 $443 $336 $289
==== ==== ==== ==== ==== ====
<CAPTION>
SELECT CAPITAL FIDELITY VIP HIGH
APPRECIATION INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ -- $ -- $ -- $ 26 $ 21 $ 18
Net realized gain (loss)....... 1 60 -- 1 13 2
Net unrealized gain (loss)..... 99 (12) 43 (4) (47) 25
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from operations........ 100 48 43 23 (13) 45
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets from policy
transactions.................. -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net
assets........................ 100 48 43 23 (13) 45
NET ASSETS:
Beginning of year................ 394 346 303 284 297 252
---- ---- ---- ---- ---- ----
End of year...................... $494 $394 $346 $307 $284 $297
==== ==== ==== ==== ==== ====
</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)
<TABLE>
<CAPTION>
FIDELITY VIP
EQUITY-INCOME FIDELITY VIP GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............................ $ 6 $ 5 $ 4 $ 1 $ 2 $ 1
Net realized gain (loss)................................ 13 18 24 55 47 9
Net unrealized gain (loss).............................. 6 18 49 129 90 57
---- ---- ---- ---- ---- ----
Net increase (decrease) in net assets from operations... 25 41 77 185 139 67
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net assets from policy
transactions.......................................... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net assets................... 25 41 77 185 139 67
NET ASSETS:
Beginning of year......................................... 393 352 275 492 353 286
---- ---- ---- ---- ---- ----
End of year............................................... $418 $393 $352 $677 $492 $353
==== ==== ==== ==== ==== ====
<CAPTION>
FIDELITY VIP FIDELITY VIP II ASSET
OVERSEAS MANAGER
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............................ $ 5 $ 5 $ 5 $ 12 $ 10 $ 8
Net realized gain (loss)................................ 8 16 17 15 30 23
Net unrealized gain (loss).............................. 118 13 7 13 7 22
---- ---- ---- ---- ---- ----
Net increase (decrease) in net assets from operations... 131 34 29 40 47 53
---- ---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS: -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net assets from policy
transactions.......................................... -- -- -- -- -- --
---- ---- ---- ---- ---- ----
Net increase (decrease) in net assets................... 131 34 29 40 47 53
NET ASSETS:
Beginning of year......................................... 306 272 243 358 311 258
---- ---- ---- ---- ---- ----
End of year............................................... $437 $306 $272 $398 $358 $311
==== ==== ==== ==== ==== ====
<CAPTION>
DGPF INTERNATIONAL
EQUITY
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............................ $ 7 $ 11 $ 9
Net realized gain (loss)................................ -- -- --
Net unrealized gain (loss).............................. 42 18 8
---- ---- ----
Net increase (decrease) in net assets from operations... 49 29 17
---- ---- ----
FROM POLICY TRANSACTIONS: -- -- --
---- ---- ----
Net increase (decrease) in net assets from policy
transactions.......................................... -- -- --
---- ---- ----
Net increase (decrease) in net assets................... 49 29 17
NET ASSETS:
Beginning of year......................................... 307 278 261
---- ---- ----
End of year............................................... $356 $307 $278
==== ==== ====
</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 insurance 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. 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), an indirect
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), 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.; and of The Delaware Group Premium Fund
(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, T. Rowe Price,
DGPF, and MFVAT (the Funds) are open-end, management investment companies
registered under the 1940 Act.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed
Select Investment Grade Income Fund and AIT Growth Fund will be renamed Core
Equity Fund.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the 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>
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, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
-------------------- --------- --------- ---------
<S> <C> <C> <C>
Growth................................................ 168 $372 $ 3.311
Investment Grade Income............................... 256 273 1.051
Money Market.......................................... 254 254 1.000
Equity Index.......................................... 149 265 4.060
Government Bond....................................... 256 264 1.011
Select Aggressive Growth.............................. 158 249 3.411
Select Growth......................................... 222 286 3.049
Select Growth and Income.............................. 256 317 1.933
Select Value Opportunity.............................. 233 296 1.521
Select International Equity........................... 218 229 2.031
Select Capital Appreciation........................... 241 267 2.053
Select Emerging Markets............................... -- -- --
Select Strategic Growth............................... -- -- --
Fidelity VIP High Income.............................. 27 302 11.310
Fidelity VIP Equity-Income............................ 16 284 25.710
Fidelity VIP Growth................................... 12 334 54.930
Fidelity VIP Overseas................................. 16 260 27.440
Fidelity VIP II Asset Manager......................... 21 313 18.670
Fidelity VIP II Index 500............................. -- -- --
T. Rowe Price International Stock..................... -- -- --
DGPF Growth & Income.................................. -- -- --
DGPF Delchester....................................... -- -- --
DGPF Capital Reserves................................. -- -- --
DGPF Cash Reserves.................................... -- -- --
DGPF DelCap........................................... -- -- --
DGPF Delaware Balanced................................ -- -- --
DGPF International Equity............................. 19 236 18.630
DGPF Small Cap Value.................................. -- -- --
DGPF Trend............................................ -- -- --
DGPF Strategic Income................................. -- -- --
DGPF Devon............................................ -- -- --
DGPF Emerging Markets................................. -- -- --
DGPF Social Awareness................................. -- -- --
DGPF REIT............................................. -- -- --
DGPF Aggressive Growth................................ -- -- --
DGPF U.S. Growth...................................... -- -- --
MFVAT U.S. Government Income.......................... -- -- --
MFVAT Asset Allocation................................ -- -- --
MFVAT Growth & Income................................. -- -- --
MFVAT Capital Growth.................................. -- -- --
MFVAT International Equity............................ -- -- --
</TABLE>
SA-14
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge. 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. For the years ended December 31, 1999, 1998, and 1997,
there were no administrative expenses applicable to Group VEL.
Allmerica Investments, Inc. (Allmerica Investments), an indirect
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.
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-15
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Group
VEL during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
-------------------- --------- -----------
<S> <C> <C>
Growth...................................................... $ 48 $ --
Investment Grade Income..................................... 17 --
Money Market................................................ 12 --
Equity Index................................................ 6 --
Government Bond............................................. 15 --
Select Aggressive Growth.................................... -- --
Select Growth............................................... 19 --
Select Growth and Income.................................... 39 --
Select Value Opportunity.................................... 21 --
Select International Equity................................. -- --
Select Capital Appreciation................................. 1 --
Select Emerging Markets..................................... -- --
Select Strategic Growth..................................... -- --
Fidelity VIP High Income.................................... 27 --
Fidelity VIP Equity-Income.................................. 19 --
Fidelity VIP Growth......................................... 56 --
Fidelity VIP Overseas....................................... 13 --
Fidelity VIP II Asset Manager............................... 27 --
Fidelity VIP II Index 500................................... -- --
T. Rowe Price International Stock........................... -- --
DGPF Growth & Income........................................ -- --
DGPF Delchester............................................. -- --
DGPF Capital Reserves....................................... -- --
DGPF Cash Reserves.......................................... -- --
DGPF DelCap................................................. -- --
DGPF Delaware Balanced...................................... -- --
DGPF International Equity................................... 7 --
DGPF Small Cap Value........................................ -- --
DGPF Trend.................................................. -- --
DGPF Strategic Income....................................... -- --
DGPF Devon.................................................. -- --
DGPF Emerging Markets....................................... -- --
DGPF Social Awareness....................................... -- --
DGPF REIT................................................... -- --
DGPF Aggressive Growth...................................... -- --
DGPF U.S. Growth............................................ -- --
MFVAT U.S. Government Income................................ -- --
MFVAT Asset Allocation...................................... -- --
MFVAT Growth & Income....................................... -- --
MFVAT Capital Growth........................................ -- --
MFVAT International Equity.................................. -- --
---- -----------
Totals...................................................... $327 $ --
==== ===========
</TABLE>
SA-16
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-17
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
---------------------------
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission ("SEC") such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
RULE 484 UNDERTAKING
--------------------
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 Prospectus to items required by Form N-8B-2
Prospectus 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 October 22, 1993 authorizing the Group VEL Account
was previously filed in Registrant's Initial Registration
Statement on June of 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) Commission Schedule was previously filed on April 16,
1998 in Post-Effective Amendment No. 4, and is
incorporated by reference herein.
(e) General Agents Agreement was previously filed on
April 16, 1998 in Post-Effective Amendment No. 4, and
is incorporated by reference herein.
(f) Career Agents Agreement was previously filed on April
16, 1998 in Post-Effective Amendment No. 4, and is
incorporated by reference herein.
(g) Form of Delaware Wholesaling Agreement was previously
filed on December 15, 1998 in Post-Effective
Amendment No. 6, and is incorporated by reference
herein.
(4) Not Applicable.
(5) Policy and Policy riders are filed herewith.
(6) Company's Restated Articles of Incorporation and Bylaws were
previously filed in Registrant's initial Registration
Statement, and are incorporated by reference herein.
<PAGE>
(7) Not Applicable.
(8) (a) Amendment dated October 30, 2000 to the Participation
Agreement between the Company and Allmerica
Investment Trust is filed herewith. Participation
Agreement between the Company and Allmerica
Investment Trust dated March 22, 2000 was previously
filed on April 25, 2000 in Post-Effective Amendment
No. 9 of Registration Statement No.
33-71056/811-8130, and is incorporated by reference
herein.
(b) Form of Amendment dated October 30, 2000 to the
Variable Insurance Products Fund Participation
Agreement is filed herewith. Amendment dated March
29, 2000 and Amendment dated November 13, 1998 to the
Variable Insurance Products Fund Participation
Agreement were previously filed on April 25, 2000 in
Post-Effective Amendment No. 9 of Registration
Statement No. 33-71056/811-8130, and are incorporated
by reference herein. 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) Form of Amendment dated October 30, 2000 to the
Variable Insurance Products Fund II Participation
Agreement is filed herewith. Amendment dated March
29, 2000 and Amendment dated October 4, 1999 to the
Variable Insurance Products Fund II Participation
Agreement were previously filed on April 25, 2000 in
Post-Effective Amendment No. 9 of Registration
Statement No. 33-71056/811-8130, and are incorporated
by reference herein. 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 Amendment to Schedule A of the T. Rowe Price
International Series, Inc. Participation Agreement is
filed herewith. 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) Participation Agreement with Goldman Sachs Variable
Insurance Trust dated November 1, 2000 is filed
herewith.
(j) Participation Agreement with J.P. Morgan Series Trust
II dated October 2000 is filed herewith.
<PAGE>
(k) Participation Agreement with PIMCO Variable Insurance
Trust August 17, 2000 is filed herewith.
(l) Amendment to the Service Fee Agreement Letter with
Morgan Stanley Asset Management, Inc. was previously
filed on April 26, 2000 in Post-Effective Amendment
No. 13 of Registration Statement No.
33-82658/811-8704, and is incorporated by reference
herein. Service Fee Agreement Letter with Morgan
Stanley Asset Management, Inc., was previously filed
in Post-Effective Amendment No. 9 on April 16, 1998,
and is incorporated by reference herein.
(m) Amendment to the Participation Agreement with Morgan
Stanley was previously filed on April 26, 2000 in
Post-Effective Amendment No. 13 of Registration
Statement No. 33-82658/811-8704, and is incorporated
by reference herein. Participation Agreement with
Morgan Stanley was previously filed in Post-Effective
Amendment No. 9 of Registration Statement No.
33-82658/811-8704 on April 16, 1998, and is
incorporated by reference herein.
(9) Directors' Power of Attorney is filed herewith.
(10) Form of Application is filed herewith.
2. Policy and Policy riders are filed herewith.
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 has duly caused this Initial 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 December, 2000.
GROUP VEL ACCOUNT
OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Charles F. Cronin
-----------------------------
Charles F. Cronin, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Initial
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 and Corporate Controller December 1, 2000
--------------------------------
Warren E. Barnes
Edward J. Parry* Director, Vice President and Chief Financial Officer
--------------------------------
Richard M. Reilly* Director and Vice President
--------------------------------
John F. O'Brien* Director, President and Chief Executive Officer
--------------------------------
Bruce C. Anderson* Director and Vice President
--------------------------------
Mark R. Colborn* Director and Vice President
--------------------------------
John P. Kavanaugh* Director, Vice President and Chief Investment Officer
--------------------------------
J. Kendall Huber* Director, Vice President and General Counsel
--------------------------------
J. Barry May* Director
--------------------------------
Robert P. Restrepo, Jr.* Director and Vice President
--------------------------------
Eric A. Simonsen* Director and Vice President
--------------------------------
Gregory D. Tranter* 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 September 18, 2000 duly
executed by such persons.
/s/ Sheila B. St. Hilaire
---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(811-7663)
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(5) Policy and Policy Riders
Exhibit 1(8)(a) Amendment dated October 30, 2000 to the Participation
Agreement between the Company and Allmerica Investment Trust
Exhibit 1(8)(b) Form of Amendment dated October 30, 2000 to the Variable
Insurance Products Fund Participation Agreement
Exhibit 1(8)(c) Form of Amendment dated October 30, 2000 to the Variable
Insurance Products Fund II Participation Agreement is filed
herewith.
Exhibit 1(8)(d) Form of Amendment to Schedule A of the T. Rowe Price
International Series, Inc.
Exhibit 1(8)(i) Participation Agreement with Goldman Sachs Variable
Insurance Trust dated November 1, 2000
Exhibit 1(8)(j) Participation Agreement with J.P. Morgan Series Trust II
dated October 2000
Exhibit 1(8)(k) Participation Agreement with PIMCO Variable Insurance Trust
dated August 17, 2000
Exhibit 1(9) Directors' Power of Attorney
Exhibit 1(10) Form of Application
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 7 Procedures Memorandum
Exhibit 8 Consent of Independent Accountants
