SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _________________
Commission file number: ___333-1783___
KEYPORT LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 05-0302931
(State of other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
125 High Street, Boston, Massachusetts 02110-2712
(Address of principal executive offices) (Zip Code)
(617) 526-1400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
There were 2,412,000 shares of the registrant's Common Stock, $1.25 par
value, outstanding as of June 30, 1997.
Exhibit Index - Page 15 Page 1 of 16
KEYPORT LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1997 and December 31, 1996 3
Consolidated Income Statement for the Six Months Ended June 30,
1997 and 1996 4
Consolidated Statement of Cash Flows for the Six Months Ended June
30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit Index 15
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30 December 31
ASSETS 1997 1996
Unaudited
Cash and investments:
Fixed maturities available for sale
(amortized cost: 1997 - $10,835,138;
1996 - $10,500,431) $ 11,051,372 $ 10,718,644
Equity securities, at fair value (cost:
1997 - $21,503; 1996 - $19,412) 40,848 35,863
Mortgage loans 63,631 67,005
Policy loans 546,630 532,793
Other invested assets 330,084 183,622
Cash and cash equivalents 1,214,950 767,385
Total cash and investments 13,247,515 12,305,312
Accrued investment income 163,010 146,778
Deferred policy acquisition costs 253,264 250,355
Value of insurance in force 65,715 70,819
Intangible assets 18,622 19,186
Federal income tax recoverable 327 323
Other assets 17,273 40,316
Separate account assets 1,171,054 1,091,468
Total assets $ 14,936,780 $ 13,924,557
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $ 11,941,972 $ 11,637,528
Current federal income taxes 135 13,123
Deferred federal income taxes 57,038 25,747
Payable for investments purchased and loaned 738,498 211,234
Other liabilities 42,941 38,476
Separate account liabilities 1,117,593 1,017,667
Total liabilities 13,898,177 12,943,775
Stockholder's equity:
Common stock, $1.25 par value; authorized
8,000 shares; issued and outstanding
2,412 shares 3,015 3,015
Additional paid-in capital 505,933 505,933
Net unrealized investment gains 73,787 73,599
Retained earnings 455,868 398,235
Total stockholder's equity 1,038,603 980,782
Total liabilities and stockholder's equity $ 14,936,780 $ 13,924,557
See accompanying notes
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENT
(in thousands)
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Investment income $210,655 $188,334 $417,170 $376,062
Interest credited to
policyholders 147,224 136,161 294,537 274,270
Investment spread 63,431 52,173 122,633 101,792
Net realized investment gains 2,669 (2,488) 15,465 (436)
Fee income:
Surrender charges 3,765 3,788 7,301 7,505
Separate account fees 4,010 3,574 7,949 7,037
Management fees 803 644 1,580 1,233
Total fee income 8,578 8,006 16,830 15,775
Expenses:
Policy benefits (1,133) (821) (2,154) (1,987)
Operating expenses (12,036) (10,223) (24,066) (22,049)
Amortization of deferred
policy acquisition costs (19,483) (14,865) (35,740) (28,973)
Amortization of value of
insurance in force (1,830) (1,850) (5,067) (3,568)
Amortization of
intangible assets (282) (282) (564) (564)
Total expenses (34,764) (28,042) (67,591) (57,141)
Income before federal income
taxes 39,914 29,650 87,337 59,990
Federal income tax expense (13,819) (9,707) (29,704) (20,359)
Net income $ 26,095 $ 19,943 $ 57,633 $ 39,631
KEYPORT LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Unaudited
Six Months Ended
June 30
1997 1996
Cash flows from operating activities:
Net income $ 57,633 $ 39,631
Adjustments to reconcile net income to
net cash provided by operating activities:
Interest credited to policyholders 294,537 274,270
Net realized investment (gains) losses (15,465) 436
Amortization of value of insurance in
force and intangible assets 5,631 4,132
Net amortization on investments 16,252 2,159
Change in deferred policy acquisition costs (5,152) (9,830)
Change in current and deferred federal
income taxes 18,201 7,830
Net change in other assets and liabilities 11,631 (160)
Net cash provided by operating activities 383,268 318,468
Cash flows from investing activities:
Investments purchased - available for sale (2,225,298) (1,315,854)
Investments sold - available for sale 975,742 478,675
Investments matured - available for sale 969,714 679,987
Increase in policy loans (13,837) (13,535)
Decrease in mortgage loans 3,374 3,984
Net cash used in investing activities (290,305) (166,743)
Cash flows from financing activities:
Withdrawals from policyholder accounts (631,770) (548,205)
Deposits to policyholder accounts 507,605 572,084
Securities lending 478,767 90,176
Net cash provided by financing activities 354,602 114,055
Change in cash and cash equivalents 447,565 265,780
Cash and cash equivalents at beginning of period 767,385 777,384
Cash and cash equivalents at end of period $1,214,950 $ 1,043,164
1. General
The accompanying unaudited consolidated financial statements of
Keyport Life Insurance Company (the Company) include all adjustments,
consisting of normal recurring accruals, that management considers
necessary for a fair presentation of the Company's financial position and
results of operations as of and for the interim periods presented. Certain
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Therefore these consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements contained in the Company's 1996 Form 10-K. The results
of operations for the three and six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
Certain prior period amounts in the accompanying unaudited consolidated
income statement have been reclassified to conform to the current period
presentation.
2. Investments
The Company's general investment policy is to hold fixed maturity
assets for long-term investment and, accordingly, the Company does not have
a trading portfolio. To provide for maximum portfolio flexibility and
enable appropriate tax planning, the Company classifies its entire fixed
maturities investments as "available for sale" and accordingly records such
investments at fair value.
3. Other Financial Instruments
As a component of its investment strategy and to reduce its exposure
to interest rate risk, the Company utilizes interest rate swap ("swap
agreements") and interest rate cap agreements ("cap agreements") to match
assets more closely to liabilities. Swap agreements are agreements to
exchange with counterparty interest rate payments of differing character
(e.g., fixed-rate payments exchanged for variable-rate payments) based on
an underlying principal balance (notional principal) to hedge against
interest rate changes. The Company currently utilizes swap agreements to
reduce asset duration and to better match interest rates earned on longer-
term fixed rate assets with interest rates credited to policyholders. The
Company had 43 outstanding swap agreements with an aggregate notional
principal amount of $2.4 billion and 39 outstanding swap agreements with an
aggregate notional principal amount $2.3 billion, as of June 30, 1997 and
December 31, 1996, respectively.
Cap agreements are agreements with a counterparty which require the
payment of a premium for the right to receive payments for the difference
between the cap interest rate and a market interest rate on specified
future dates based on an underlying principal balance (notional principal)
to hedge against rising interest rates. The Company had interest rate cap
agreements with an aggregate notional amount of $450.0 million as of June
30, 1997 and December 31, 1996, respectively.
With respect to the Company's equity-indexed annuity, the Company buys
call options on the Standard & Poor's 500 Composite Stock Price Index ("S&P
500 Index") to hedge its obligations to provide returns based upon this
index. The Company had call options with a book value of $241.3 million
and $109.6 million as of June 30, 1997 and December 31, 1996, respectively.
Hedge accounting is applied after the Company determines that the
items to be hedged expose it to interest rate or price risk, designates the
instruments as hedges, and assesses whether the instruments reduce the
indicated risks through the measurement of changes in the value of the
instruments and the items being hedged at both inception and throughout the
hedge period. From time to time, interest rate swap agreements, cap
agreements and indexed call options are terminated. If the terminated
position was accounted for as a hedge, realized gains or losses are
amortized over the remaining lives of the hedged assets or liabilities.
Conversely, if the terminated position was not accounted for as a hedge, or
the assets and liabilities that were hedged no longer exist, the position
is "marked to market", and realized gains or losses are immediately
recognized in income.
The net differential to be paid or received on interest rate swap
agreements is recognized as a component of net investment income. Premiums
paid for interest rate cap agreements are deferred and amortized to net
investment income on a straight-line basis over the terms of the
agreements. The unamortized premium is included in other invested assets.
Amounts earned on interest rate cap agreements are recorded as an
adjustment to net investment income. Interest rate cap agreements and swap
agreements hedging investments designated as available for sale are
adjusted to fair value with the resulting unrealized gains and losses
included in stockholder's equity.
Premiums paid on indexed call options are amortized to net investment
income over the terms of the contracts. The call options are included in
other invested assets and are carried at amortized cost plus intrinsic
value, if any, of the call options as of the valuation date. Changes in
intrinsic value of the call options are recorded as an adjustment to
interest credited to policyholders.
There are risks associated with some of the techniques the Company
uses to match its assets and liabilities. The primary risk associated with
swap, cap and call option agreements is the risk associated with
counterparty nonperformance. The Company believes that the counterparties
to its swap and call option agreements are financially responsible and that
the counterparty risk associated with these transactions is minimal.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net income was $26.1 million for the second quarter of 1997 compared
to $19.9 million for the second quarter of 1996. For the first six months
of 1997, net income was $57.6 million compared to $39.6 million for the
first six months of 1996. These increases resulted from higher investment
spread and higher fee income. In addition, the six month 1997 period
included higher net realized investment gains. The second quarter of 1997
included net realized investment gains of $2.7 million compared to net
realized investment losses of $2.5 million for the second quarter of 1996.
Partially offsetting these items were increased amortization of deferred
policy acquisition costs and federal income tax expense.
Investment spread is the amount by which investment income earned on
the Company's investments exceeds interest credited to policyholder
balances. Investment spread was $63.4 million for the second quarter of
1997 compared to $52.2 million for the second quarter of 1996. The amount
by which the average yield on investments exceeds the average interest
credited rate on policyholder balances is the investment spread percentage.
Such investment spread percentage was 1.93% for the second quarter of 1997
compared to 1.84% for the second quarter of 1996. For the first six months
of 1997, investment spread was $122.6 million compared to $101.8 million
for the first six months of 1996. The investment spread percentage was
1.89% for the first six months of 1997 compared to 1.80% for the first six
months of 1996.
Investment income was $210.7 million for the second quarter of 1997
compared to $188.3 million for the second quarter of 1996. The increase of
$22.4 million in 1997 compared to 1996 primarily relates to a $28.0 million
increase as a result of the higher level of average invested assets,
partially offset by an $5.6 million decrease resulting from a lower average
investment yield. The average investment yield was 6.92% for the second
quarter of 1997 compared to 7.13% for the second quarter of 1996. For the
first six months of 1997, investment income was $417.2 million compared to
$376.1 million for the first six months of 1996. The increase of
$41.1 million for the first six months of 1997 compared to the first six
months of 1996 primarily relates to a $55.3 million increase as a result of
the higher level of average invested assets, partially offset by a
$14.2 million decrease resulting from a lower average investment yield.
The average investment yield was 6.90% for the first six months of 1997
compared to 7.17% for the first six months of 1996.
Interest credited to policyholders totaled $147.2 million for the
second quarter of 1997 compared to $136.2 million for the second quarter of
1996. The increase of $11.0 million in 1997 compared to 1996 primarily
relates to an $18.8 million increase as a result of a higher level of
average policyholder balances, partially offset by a $7.8 million decrease
resulting from a lower average interest credited rate. Policyholder
balances averaged $11.8 billion for the second quarter of 1997 compared to
$10.3 billion for the second quarter of 1996. The average interest
credited rate was 4.99% for the second quarter of 1997 compared to 5.29%
for the second quarter of 1996. For the first six months of 1997, interest
credited to policyholders totaled $294.5 million compared to $274.3 million
for the first six months of 1996. The increase of $20.2 million for the
first six months of 1997 compared to the first six months of 1996 primarily
relates to a $38.4 million increase as a result of a higher level of
average policyholder balances, partially offset by a $18.2 million decrease
resulting from a lower average interest credited rate. Policyholder
balances averaged $11.7 billion for the first six months of 1997 compared
to $10.2 billion for the first six months of 1996. The average interest
credited rate was 5.01% in 1997 compared to 5.37% in 1996.
Average investments (computed without giving effect to SFAS 115),
including a portion of the Company's cash and cash equivalents, were
$12.2 billion for the second quarter of 1997 compared to $10.6 billion for
the second quarter of 1996. For the first six months of 1997, such average
investments were $12.1 billion compared to $10.5 billion for the first six
months of 1996. These increases primarily relate to a 100 percent
coinsurance agreement with respect to a $954.0 million block of single
premium deferred annuities ("SPDAs") entered into with Fidelity & Guaranty
Life Insurance Company ("F&G Life") during the third quarter of 1996 and
the investment of portfolio earnings for the twelve months ended June 30,
1997 of $0.8 billion. Under the F&G Life transaction, the investment risk
of the policies was transferred to the Company, while F&G Life continues to
administer the policies.
Net realized investment gains were $2.7 million for the second quarter
of 1997 compared to net realized investment losses of $2.5 million for the
second quarter of 1996. For the first six months of 1997, net realized
investment gains were $15.5 million compared to net realized investment
losses of $0.4 million for the first six months of 1996. Sales of fixed
maturity investments generally are made to maximize total return. The net
realized investment gains in 1997 included gains on the sales of fixed
maturity investments of $8.1 million and gains on redemption of seed money
investments in separate account mutual funds sponsored by the Company of
$7.4 million. The net realized investment losses in 1996 were attributable
to sales of fixed maturity investments.
Surrender charges are revenues earned on the early withdrawal of
fixed, equity-indexed and variable annuity policyholder balances. Surrender
charges on fixed, equity-indexed and variable annuity withdrawals generally
are assessed at declining rates applied to policyholder withdrawals during
the first five to seven years of the contract. Total surrender charges were
$3.8 million for the second quarter of 1997 and 1996. For the first six
months of 1997, surrender charges were $7.3 million compared to
$7.5 million for the first six months of 1996.
On an annualized basis, total fixed, equity-indexed and variable
annuity withdrawals represented 10.9% and 10.8% of the total average
annuity policyholder and separate account balances for the second quarter
of 1997 and 1996, respectively, and 11.0% and 10.3% of the total average
policyholder and separate account balances for the first six months of 1997
and 1996, respectively. The increase in withdrawals in 1997 was primarily
attributable to surrenders of annuities acquired in the F&G Life
transaction; excluding these surrenders, the withdrawal percentage for the
first six months of 1997 would have been 9.6%.
Separate account fees are primarily mortality and expense charges
earned on variable annuity and variable life policyholder balances. These
fees, which are based on the market values of the assets supporting the
contracts in separate accounts, were $4.0 million for the second quarter of
1997 compared to $3.6 million for the second quarter of 1996. Such fees
represented 1.5% of average variable annuity and variable life separate
account balances for the second quarter of 1997 and 1996. For the first
six months of 1997, separate account fees were $7.9 million compared to
$7.0 million in first six months of 1996. These fees represented 1.5% of
average variable annuity and variable life separate account balances for
the first six months of 1997 and 1996.
Management fees are primarily investment advisory fees related to the
separate account assets. The fees are based on the levels of assets under
management, which are affected by product sales and redemptions and changes
in the market values of the investments managed. Management fees were
$0.8 million for the second quarter of 1997 compared to $0.6 million for
the second quarter of 1996. The increase of $0.2 million in 1997 compared
to 1996 primarily reflects a higher level of average assets under
management. For the first six months of 1997, management fees were
$1.6 million compared to $1.2 million in 1996. The increase of
$0.4 million in 1997 compared to 1996 primarily reflects a higher level of
average assets under management
Operating expenses primarily represent compensation and other general
and administrative expenses. These expenses were $12.0 million for the
second quarter of 1997 compared to $10.2 million for the second quarter of
1996. For the first six months of 1997, operating expenses were
$24.1 million compared to $22.0 million for the first six months of 1996.
The increase in 1997 compared to 1996 was primarily due to higher employee
related expenses.
Amortization of deferred policy acquisition costs relates to the costs
of acquiring new business which vary with, and are primarily related to,
the production of new annuity business. Such costs include commissions,
costs of policy issuance and underwriting and selling expenses.
Amortization was $19.5 million for the second quarter of 1997 compared to
$14.9 million for the second quarter of 1996. Amortization of deferred
policy acquisition costs was $35.7 million for the six months ended June
30, 1997 compared to $29.0 million for the six months ended June 30, 1996.
The increase in amortization in 1997 compared to 1996 was primarily related
to the increase in investment spread from the growth of business in force
associated with fixed, equity-indexed and variable annuity products.
Amortization expense represented 30.7% and 28.5% of investment spread for
the second quarter of 1997 and 1996, respectively. For the first six
months of 1997 and 1996, the corresponding percentages were 29.1% and
28.5%, respectively.
Amortization of value of insurance in force relates to the actuarially-
determined present value of projected future gross profits from policies in
force at the date of acquisition. Amortization totaled $1.8 million for
the second quarter of 1997 compared to $1.9 million for the second quarter
of 1996. The second quarter of 1997 included increased amortization of
$1.5 million related to the F&G Life transaction offset by decreased
amortization related to a change in mortality assumptions. Amortization of
value of insurance in force totaled $5.1 million for the six months ended
June 30, 1997 compared to $3.6 million for the six months ended June 30,
1996. The first six months of 1997 included increased amortization of
$3.0 million related to the F&G Life transaction partially offset by
decreased amortization related to a change in mortality assumptions.
Federal income tax expense was $13.8 million or 34.6% of pretax income
for the second quarter of 1997 compared to $9.7 million, or 32.7% of pretax
income for the second quarter of 1996. For the first six months of 1997,
federal income tax expense was $29.7 million or 34.0% of pretax income,
compared to $20.4 million or 33.9% of pretax income for the first six
months of 1996.
Financial Condition
Stockholder's equity as of June 30, 1997 was $1.04 billion compared to
$0.98 billion as of December 31, 1996. The increase in stockholder's equity
was due to a $0.2 million increase in net unrealized gains and
$57.6 million of net income for the period.
The Company's total investments at June 30, 1997 reflected net
unrealized gains of $231.3 million. At December 31, 1996, such net
unrealized investment gains were $229.8 million.
Approximately $10.7 billion, or 97.1%, of the fixed maturity
investments at June 30, 1997, was rated by Standard & Poor's Corporation,
Moody's Investors Service or under comparable statutory rating guidelines
established by the National Association of Insurance Commissioners. At
June 30, 1997, the carrying value of investments in below investment grade
securities totaled $1.0 billion, or 7.7% of total cash and investments of
$13.2 billion compared to $1.0 billion, or 8.0% of total cash and
investments of $12.3 billion at December 31, 1996. Below investment grade
securities generally provide higher yields and involve greater risks than
investment grade securities because their issuers typically are more highly
leveraged and more vulnerable to adverse economic conditions than
investment grade issuers. In addition, the trading market for these
securities is usually more limited than for investment grade securities.
Management of the Company's Investments
Asset-liability management is utilized by the Company to minimize the
risks of interest rate fluctuations and policyholder withdrawals. The
Company believes that its fixed and equity-indexed policyholder balances
should be backed by investments, principally comprised of fixed maturities,
that generate predictable rates of return. The Company does not have a
specific target rate of return. Instead, its rates of return vary over time
depending on the current interest rates, the slope of the yield curve and
the excess at which fixed maturities are priced over the yield curve. Its
portfolio strategy is designed to achieve acceptable risk-adjusted returns
by effectively managing portfolio liquidity and credit quality.
The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder
balances. The Company seeks to achieve an acceptable spread between what it
earns on its assets and interest credited on its policyholder balances by
investing principally in fixed maturities. The Company's fixed-rate
products incorporate surrender charges to encourage persistency and make
the cost of its policyholder balances more predictable. Approximately 85.9%
of the Company's fixed annuity policyholder balances were subject to
surrender charges at June 30, 1997 compared to 85.4% at December 31, 1996.
As part of its asset-liability management discipline, the Company
conducts detailed computer simulations that model its fixed-maturity assets
and liabilities under commonly used stress-test interest rate scenarios.
Based on the results of these computer simulations, the investment
portfolio has been constructed with a view to maintaining a desired
investment spread between the yield on portfolio assets and the interest
credited on its policyholder balances under a variety of possible future
interest rate scenarios. At June 30, 1997 and December 31, 1996, the
effective duration of the Company's fixed maturities investments (including
certain cash and cash equivalents) was approximately 2.8 years.
As a component of its investment strategy and to reduce its exposure
to interest rate risk, the Company utilizes interest rate swap and interest
rate cap agreements to match assets more closely to liabilities. Swap
agreements are agreements to exchange with counterparty interest rate
payments of differing character (e.g., fixed-rate payments exchanged for
variable-rate payments) based on an underlying principal balance (notional
principal) to hedge against interest rate changes. The Company currently
utilizes swap agreements to reduce asset duration and to better match
interest rates earned on longer-term fixed-rate assets with interest
credited to policyholders. The Company had 43 outstanding swap agreements
with an aggregate notional principal amount of $2.4 billion and 39
outstanding swap agreements and with an aggregate notional principal amount
$2.3 billion, as of June 30, 1997 and December 31, 1996, respectively.
Cap agreements are agreements with a counterparty which require the
payment of a premium for the right to receive payments for the difference
between the cap interest rate and a market interest rate on specified
future dates based on an underlying principal balance (notional principal)
to hedge against rising interest rates. The Company had interest rate cap
agreements with an aggregate notional amount of $450.0 million as of June
30, 1997 and December 31, 1996, respectively.
With respect to the Company's equity-indexed annuity, the Company buys
call options on the S&P 500 Index to hedge its obligations provide returns
based upon this index. The Company had call options with a book value of
$241.3 million and $109.6 million as of June 30, 1997 and December 31,
1996, respectively.
There are risks associated with some of the techniques the Company
uses to match its assets and liabilities. The primary risk associated with
swap, cap and call option agreements is counterparty nonperformance. The
Company believes that the counterparties to its swap and call option
agreements are financially responsible and that the counterparty risk
associated with these transactions is minimal
The Company routinely reviews its portfolio of investment securities.
The Company identifies monthly any investments that require additional
monitoring, and carefully reviews the carrying value of such investments at
least quarterly to determine whether specific investments should be placed
on a nonaccrual basis and to determine declines in value that may be other
than temporary. In making these reviews, the Company principally considers
the adequacy of collateral (if any), compliance with contractual covenants,
the borrower's recent financial performance, news reports and other
externally generated information concerning the creditor's affairs. In the
case of publicly traded fixed maturity investments, management also
considers market value quotations, if available.
Liquidity
The Company's liquidity needs and financial resources pertain to the
management of the general account assets and policyholder balances. The
Company uses cash for the payment of annuity and life insurance benefits,
operating expenses and policy acquisition costs, and the purchase of
investments. The Company generates cash from annuity premiums and deposits,
net investment income, and from maturities and sales of its investments.
Annuity premiums, maturing investments and net investment income have
historically been sufficient to meet the Company's cash requirements. The
Company monitors cash and cash equivalents in an effort to maintain
sufficient liquidity and has strategies in place to maintain sufficient
liquidity in changing interest rate environments. Consistent with the
nature of its obligations, the Company has invested a substantial amount of
its general account assets in readily marketable securities. At June 30,
1997, $10.0 billion, or 75.2%, of the Company's general account investments
are considered readily marketable.
To the extent that unanticipated surrenders cause the Company to sell
for liquidity purposes a material amount of securities prior to their
maturity, such surrenders could have a material adverse effect on the
Company. However, the Company believes that liquidity to fund withdrawals
would be available through incoming cash flow, the sale of short-term or
floating-rate instruments or investment securities in its short duration
portfolio, thereby precluding the sale of fixed maturity investments in a
potentially unfavorable market.
Current Rhode Island insurance law permits the payment of dividends or
distributions from the Company to Liberty Financial, which, together with
dividends and distributions paid during the preceding 12 months, do not
exceed the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year. Any proposed dividend in excess of this amount is called an
"extraordinary dividend" and may not be paid until it is approved by the
Commissioner of Insurance of the State of Rhode Island. As of June 30,
1997, the amount of dividends that the Company could pay without such
approval was $42.5 million.
Based upon the historical cash flow of the Company, the Company's
current financial condition and the Company's expectation that there will
not be a material adverse change in the results of operations of the
Company and its subsidiaries during the next twelve months, the Company
believes that cash flow provided by operating activities over this period
will provide sufficient liquidity for the Company to meet its liquidity
needs. The Company's cash flow may be influenced by, among other things,
general economic conditions, realized investment gains and losses, the
interest rate environment, market changes, regulatory changes and tax law
changes.
Effects of Inflation
Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio
in part to reduce its exposure to interest rate fluctuations. In general,
the fair value of the Company's fixed maturity portfolio increases or
decreases in inverse relationship with fluctuations in interest rates, and
the Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline the Company's fixed maturity investments generally will increase in
fair value, while net investment income will decrease as fixed maturity
investments mature or are sold and the proceeds are reinvested at reduced
rates. However, inflation may result in increased operating expenses that
may not be readily recoverable in the prices of the services charged by the
Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
#27 Financial Data Schedule - page 15
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEYPORT LIFE INSURANCE COMPANY
_________/s/ Bernhard M. Koch_________
Bernhard M. Koch
(Duly Authorized Officer and Chief Financial
Officer)
_________/s/ Jeffery J.Whitehead_______
Jeffery J. Whitehead
(Duly Authorized Officer and Chief Accounting
Officer)
Date: August 14, 1997
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 16